Q3 2019 Earnings Call

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The conference over to your Speaker today, and your Slaven Executive Vice President Global Investor strategy. Please go ahead Sir.

Good morning, everyone and thank you for joining us for discoveries third quarter 2019 earnings call. Joining me today, our David Zaslav, Our President and Chief Executive Officer, Gunnar Wiedenfels, Our Chief Financial Officer, JV, Brett President and CEO Discovery networks International and Peter Ferrous <unk> CEO .

Global direct to consumer you Should've received our earnings release, but if not feel free to access it on our website at www Dot corporate discovery Dot com.

On today's call, we will begin with some opening comments from David and owner and then we'll open the call for David Garner JV and Peter to take your questions.

Before we start I would like to remind you that comments today regarding the company's future business plans prospects of financial performance. Our 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 could differ materially from 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 31st 2018, an hour subsequent filings made with the U.S. Securities and Exchange Commission and with that.

Let's turn the call over to David.

Good morning, everyone and thank you for joining us to discuss our Q3 results and outlook.

Discovery reported an impressive quarter of operating financial results.

Form it's at the top end of our competitive set.

Across all business isn't regions, we met or exceeded our guidance.

With a notable acceleration in our international segment.

High single digit growth.

Overall, very strong set of numbers by any measure.

I believe we have the best operating team in media today.

I am proud of what we've accomplished both in the quarter.

And since our acquisition of scripts early last year.

It is a story promises made.

And promises delivered.

And in most cases over delivered.

To that point.

Well before we closed on scripts, we talked about our goal of being able to generate $3 billion a free cash flow.

For the acquisition, we were generating about 1.4 billion and scripts was generating about 700.

Today, we are at 2.9 billion for the trailing 12 month period.

And having generated nearly 900 million in free cash flow this quarter, we feel good about that goal.

Our net leverage.

We had been relentlessly focused on reducing our financial leverage from the post merger peak of nearly 4.8 times net debt to EBITDA.

And at the end of Q3, our net leverage 3.1 times is close to the low end of our target range.

We have begun to return capital to our shareholders, having repurchased $300 million, a bar equity or nearly 12 million shares in Q3.

With additional purchases in Q4.

Well at the same time reinvesting in our future growth strategy.

From the beginning we viewed scripts as much more than a portfolio of cable channels, but rather a trove of global IP.

With among the strongest lifestyle brands programming and personalities in the world.

We envisioned a major opportunity to not only enhance their position globally.

But also to carve out a differentiated direct to consumer strategy.

A few weeks ago, we launched another key component of that strategy with food network kitchen.

A world class customer experience in the kitchen with live and on demand cooking classes with the most celebrated chefs from around the globe.

We work closely on all elements of the product with our partner Amazon over the last year to get it off the ground.

We're very pleased with the product.

Very excited about the opportunity of value creation it presents.

And to support our broad strategic initiatives.

We've taken a major step forward in the seamless rollout of our singularly owned and operated Tech stack.

Onto which all of our direct to consumer platforms will sit from de play across Europe and motor trend on demand.

So the Eurosport player.

Our global cycling that work golf, TV, Magnolia and a factual content service.

Everything we said we were going to do.

We've done.

And looking forward, we are equally focused on delivering against an aggressive set of objectives within an industry undergoing wheel disruption.

Yeah discovery has always punched above its weight by being nimble opportunistic and flexible and leveraging every opportunity to put our content and beloved brands every where consumers are across an unrivaled global footprint.

It is core to how we operate.

It's our north star and the engine behind what drives our broader strategy and investments in our future.

Today, there are more ways than ever to get content to consumers and we are well positioned as anyone to leverage every path and platform to monetize our content investments across both linear and direct to consumer.

It starts with strategic decisions, we made many years ago.

To control, our destiny and build long term value my owning and controlling our IP globally.

Content and brands that people love.

Which was further strengthened by the scripts portfolio.

We generate roughly 8000 hours of original content annually.

Alongside a library of titles in every language that aggregate several hundred thousand.

It's a huge competitive advantage, especially as we watch our industry peers on the premium scripted side pay whatever it takes to amass enough content for slice of the fragmenting entertainment space within the direct to consumer market.

We're not in that series scripted and movie side of the entertainment business.

It is crowded its aggressive it's expensive and it's risky.

As women over the past year around America have put their TV sets on.

They can choose to watch movies scripted series they could watch anything they want.

But more have chosen to watch our programming and any other media company.

Which makes us a number one media company for women in the United States.

In addition.

Our strategy of pivoting into sports.

Has made us the largest producer of live sports outside the U.S.

Another aggregation of IP that we think is high on the value chain.

Our investment in World Class IP.

Finds our beloved brands in areas people love and drives powerful engagement across our portfolio.

Our international footprint across 200, plus markets is unrivaled with an average of 10 to 12 free to air or cable channels in every key television market.

Owning great content the people love.

Strong brands.

And operating at scale is important.

But no longer enough.

We're also focused on building industry, leading capabilities and proprietary tech IP. So we can create truly compelling customer experiences and ecosystems.

As I noted, we launched food network kitchen, two weeks ago.

First of its kind experience offering the most complete food and cooking digital ecosystem.

With content and interactive features.

As well as the largest roster of iconic cooking talent.

We've got the peloton of food, but we are priced for the masses, we'd like to be in everybody's kitchen.

It is powered by unique partnership with Amazon.

As well as the biggest promotional push ever across our network portfolio.

With food and cooking.

Being big funnels to drive and create value.

Food network kitchen is also the first new product to launch on our owned and operated Tech stack and is becoming increasingly apparent that owning and operating our own tech architecture is a distinct competitive advantage.

And one that should allow us to further scale opportunities across multiple verticals.

Meaningfully driving global functionality efficiencies and speed to market.

Peter Farsi, who oversaw a marketplace for Amazon has been a big helped to us and he's here with us today, you'll be able to answer some questions during Q1 day.

Switching gears to our core traditional business our performance has been solid.

Though domestic ratings our work in progress across certain properties.

Networks like TLC have been nothing short of a phenomenon in our industry.

The team at TLC has done an extraordinary job turning around in building that network just two years ago. It was the ninth or 10th network in America for women today.

It continues to be the number one AD supported cable network in primetime women 25 to 54.

And women 18 to 49.

Together with TLC and our other networks. It allows us to reach almost 35% of women on Sunday nights in America.

It's a great great story, it's what we do and were attacking every one of our channels for growth.

And at HGTV very Brady renovation delivered its biggest hit all time.

A prime example, a bus leaning into our scale with an ambitious creative swing supported across a broad network portfolio.

We recently announced that the Brady bunch gang will return for holiday special.

Our portfolio performance helped to secure opposition at the number one TV destination for women 25 to 54 once again during the quarter.

And in fact for the better part of the year.

And our best in class go ops, along with products like discovery Premier engage form the backbone of uniquely secular growth narrative within an industry that has been largely static.

And as such we are definitively taking share.

On the international front, our business continues to show signs of steady growth.

In part driven by continued programming in audience strength.

Fraction of our direct to consumer products as well as further integration of the scripts content and brands around the world.

Once again, our share of market and delivery across our top 10 markets was up.

With growth of 3% and 2% respectively building on last quarter's very strong increases.

Our international growth was driven by the highest Q3 ever for EMEA.

Led by strength in the UK in Italy, both of which delivered record audiences in July and August up, 12% and 9% respectively.

This also has helped insulate us from ongoing macro weakness in these key markets, especially in the UK.

Where our commercial share of market has increased to roughly 8% JB Brett is here with us and can discuss in more detail. The strides we are making not just in Europe , but all around the globe.

With exciting locally differentiated streaming products, gaining traction and expanding we aim to become the who equivalent in select TV markets in Europe .

Our strategy in certain cases has been to partner with key local players that broaden the content offering and share of market.

In Germany, our JV with pro Sseven.

Joined which combined 55 channels into one app has become a leading streaming platform since launching in June with more than 4 million monthly average users.

And we announced a few weeks back it in our largest European market Poland.

We will launch a single screaming destination to access a powerhouse of Polish content in partnership with leading media and distribution company wholesale.

We're very excited about this opportunity and our team is looking at other large market opportunities.

I would also Ed that getting deals like this does not easy.

We lean on our local teams in the credibility and relationships they built over the years.

There's a lot to appreciate and getting the structured deals content technology and partnership in the aggregate off the ground.

There were a number of markets, where we aggregate all of our content and go to market alone.

And the brand we use is deeply.

And do you play has now expanded to 10 countries internationally, including Japan, The Nordics, Italy, Spain, and most recently in the UK in Ireland.

The play has some great momentum.

Particularly after having been repositioned onto our own tech platform and its given US a lot of learning about how to position a large aggregated content service.

People are consuming more content in the aggregate than ever before.

But every program or is battling for People's free time and attention.

And we are driving deeper connections with our fans are more cost effective manner.

And many others.

Behind our brands and personalities big personalities.

Which have delighted audiences for in some cases decades, we are taking that engagement and those personalities and putting it on steroids.

Whether it is unique you wouldn't do experiences like food network kitchen.

Aggregated he bought an S vod platforms in Europe , and even looking at lifting large collections of our channels and taking them on to OTI tea.

And pushing them into distribution around the globe.

We have great assets resources, IP and at a debt management team with local knowledge and infrastructure than a well equipped to succeed across the ecosystem.

We're super excited about the direction and opportunities ahead.

Our operating performance is strong and stable.

And while the industry is undergoing secular challenges.

We are facing disruption head on the very confident operating posture strategic position.

Our focused financial investments in our world class IP and relentless pursuit of new revenue opportunities makes us a stronger company than we were a year ago.

And one that is on a path to continued sustainable success.

Many thanks, and I will turn the call over now to garner.

Thank you David and thank you everyone for joining us today I'm very pleased with our third quarter operational and financial performance. We continue to build momentum as we deliver on our strategic objectives to transform and pivot discovery.

I'd like to share some financial highlights from our third quarter My comments will be in constant currency terms for our international business as well, that's where total company unless otherwise stated.

And please refer to our earnings release published earlier this morning for a more comprehensive view of all the drivers of our third quarter financial results.

In the third quarter discovery again achieved healthy operating performance delivering 3% U.S. advertising growth, 6% U.S. affiliate growth, 10% International advertising growth, which included a full quarter of impact from the consolidation of the three networks acquired from you pay TV, which added about 300 basis points of growth.

And 8% International affiliate growth.

We grew total company adjusted OIBDA, 9%, driven by revenue growth and to 7% decline in U.S. expenses, which helped us to maintain an almost flat expense base.

As we've previously flagged we've anticipated that expenses in our international business will ramp up as we invest for future growth.

Turning to one of my priority topics, we reported $884 million a free cash flow in the third quarter, keeping our trailing 12 month free cash flow at 2.9 billion, which is inclusive of about 200 million of cash restructuring costs as well as the funding for growth investments.

At quarter end or net leverage was 3.1 times.

Now, let me share some forward looking commentary starting with the four key revenue drivers for the fourth quarter 2019.

First for you as advertising growth is expected to be again in the low single digit range driven by the typical dynamics and pricing digital monetization the health of the market and of course, the impact from ratings, which remains the greatest variable impacting us AD revenue growth.

Why ratings of some key networks have been challenged in the third quarter, we have doubled the amount of premier content on the food network for the holiday season, and we are excited about our programming slate for the remainder of the year.

Not that our Q4 estimate of low single digit growth could turn out to be conservative.

In addition, we expect the continued to benefit from increased viewership on our goal platform.

Further growth from our data driven engage product as well as upward CPM pressure from innovation, such as discovery Premier all of which are contributing to our top of peer performance and revenue growth. Despite the noted ratings headwinds.

Second U.S. affiliate is projected to increase in the 3% to 5% range for the fourth quarter and we reaffirm our full year guidance for U.S. affiliate revenue growth in the mid single digit range as you know in the fourth quarter, we will that our initial inclusion in certain virtual MPPD such as who'll in sling TV.

Accordingly implicit in this projection is a sequential decline in our core subscriber.

Third we expect international advertising growth in the mid single digit range driven by share growth in our top markets and contributions from our digital investments contribution from the consolidated you pay TV lifestyle business is projected to again add two to three percentage points of growth.

While the balance of our international advertising business remains healthy there are some increasingly more challenging markets, such as Mexico, and Argentina, creating an overall more volatile picture and one that we will keep a close eye on during the remainder of the quarter.

And finally international affiliate growth is expected to be again in the high single digit range supported by favorable terms in certain new affiliate deals new channel launches and traction from our suite of D to C products.

Turning to total company guidance, we continue to expect solid free cash flow growth for the remainder of the year, even as we continue to invest in the build out of our expanded digital ecosystem and our previously noted step up in Capex from such items as global real estate consolidation and transformation projects related to technology infrastructure and software development.

Turning now to our direct to consumer investments.

We now expect the impact from direct to consumer investments on full year 2019, adjusted OIBDA to be at the lower end of the 300 to 400 million range. We have previously discussed.

And though we again enjoyed another quarter of total company margin improvement, which was 100 basis points higher this quarter.

The expected ramp in our digital investment spending will flow through more meaningfully in Q4 as we have previously detailed with you.

Turning now to our capital allocation strategy, our priorities remain consistent we continue to expect to number one optimized leverage while we are nicely within our three to three and a half times net leverage range. We expect to continue to de lever further towards the very low end of this range.

Number two concurrently we will continue to evaluate value enhancing investments along with strategic M&A.

But three finally, we will opportunistically return excess capital to shareholders as noted in the third quarter, we repurchased nearly 12 million class C. Common shares for a total consideration of $300 million at an average price of $25, a 93 cents per share with additional purchases thus far into Q4.

Before I close let me quantify the expected impact of foreign exchange will have on our 2019 financial results.

Given the movement of the dollar at current spot rates FX is now expected to negatively impact revenues by roughly $245 million to $255 million and a little bit by $90 million to $100 million versus our 2018 reported results.

In closing our results today highlight the consistency of our company's overall performance, particularly at the time of great change within our industry.

I couldn't be more pleased with our strategic and financial position looking ahead, we remain confident in our ability to generate healthy free cash flow and execute on our long term growth initiatives.

Thank you for your time this morning, and now David JB, Peter and I will be happy to answer any questions that you may have.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Keith.

First question comes from Jessica Ehrlich with Bank of America. You May proceed with your question.

Thank you so much on can you give us some color and what's going on with food network kitchen.

I know, it's only two weeks, but how many.

I guess users do you have so far can you give us some color on on ancillary revenue at the shopping App is amazing and then I'm just due to see kind of what's your view is wearable discovery be.

Over the next five years what are the surfaces can you launch you have so many brands what do you think that this will look like you. Thank you.

Yes, I'm going to.

Headed overdue.

Peter for the food stuff, but let me address the broader issue.

We have.

As you know, we've we've really shied away from these seven or eight players that are rocketing Soc them.

Fighting it out in this entertainment area, it's getting more and more expensive.

And we believe that.

Three or four of them are going to make it and it's going to be a lot of carnage and.

Very very difficult great companies and good luck to them.

But when we look at the overall space, we really have to strategy is one is the people will have three of those are made before those but then they still love golf.

They still love natural history, and science, we together with everything we got from the BBC now have a definitive collection of of content with planet Earth Blue Planet Space Ocean Science that if you think about when we were younger a family would buy world book or or or.

Encyclopedia Botanic up because every family and every child should see it we have a collection of natural history and science content not just in scale and having the majority of it that exists and every language, but a collection of content that every family in every child should watch which is very differentiated from.

Watching cod watching scripted series movies.

We have chip in July to gains.

And we'll be launching in 2020 with them with direct to consumer.

And we have cycling and cars and so we're going in these niches, we're doing a very good job and Peter will speak to it of developing a uniform platform. So it's very easy for us to just jump on that platform has inter activity. It has the ability to do have commercial to buy things to buy cycling equipment to buy golf equipment and so we.

I think that that's a terrific strategy and it started to bear real fruit for us.

In addition, we were doing very well with our go our direct to consumer product, which is growing massively and it gave us real confidence that people that are not subscribing to cable love our content.

Together with deep play, which is scaling around the world and so.

Outside the U.S. you see that our strategy is becoming clearer.

Got it together with proceed been in Germany, and we announced that we had 4 million subscribers as of last quarter Prosieben announced this morning that there's now 5 million subscribers.

That are that are using join on a regular basis and when you think of Germany.

You got Sky Deutschland has been in business there for 10 years, it would have 4 million subscribers.

There have paying subscribers, but in four months or five months, we have 5 million users.

At or that are spending significant amount of time with us with joint and the reason is weve aggregated 55 channels on a massive amount of great local content. So Netflix is doing all their thing Disney will do their thing, but we have local local local same thing is true in Poland, We announced the deal with Paul set which is.

Were the largest player in Poland with TV in the second largest player as Paul said, the third largest players the government.

Paul set and we are coming together to create our own local Netflix product. It worked its working very well in Germany, it's working well and northern Europe with de play for Us and we think by aggregating with others, we could really be differentiated with local so that's our European strategy and it's rolling out. It's ahead of plan, we're learning a ton.

And our platform is working.

In the U.S. I'll, just say that where were now starting to examine a new opportunity.

I mentioned it in my comments that.

People could watch anything.

But they're spending we're all looking at the viewing patterns of our content. Our the aggregate of all of our channels makes us not just number one for women, but if you think about the basic cable ecosystem people could watch anything they award.

But more of them are choosing to watch us.

And you have some of these platforms launching with H series 10 series or a bunch of movies and series to come we have hundreds of thousands of hours that people grew up on.

When you aggregate all of our product in the U.S.

We're looking now whether we should just aggregate you have eight people that are doing entertainment unscripted and we're examining the opportunity of in addition to what we're doing here of aggregating all of our content in the U.S. and having something that looks very different it's very deep has great personalities great brands secured through.

And so more to come on that on the next set in the next several months.

But it feels very good right now to us in terms of our niche strategy with passion and depth view and do our our strategy in Europe of aligning with the other big players and accelerating into that with the play enjoying and with Paul sat and finally with all the success, we're having here in the U.S.

We're saying hey, maybe why not it looks like we have the most won't have the most compelling content on the deepest library of anyway.

So.

With that let me.

Let me pass off the Peter Odd food network kitchen, which is off to a great great start and we're super proud of it good morning, Jessica Yeah, We're super pleased with the results so far.

One of the biggest lessons of my time at Amazon is if you really want to drive the outputs and the outputs here or things like subscribers revenue at the very beginning of launching a new product you really have to focus on the inputs. So we're obsessed right now with focusing on the inputs in the inputs that I'll give you some feedback on our about.

Customer ratings, the customer experience how engaged our today and what do the early customers think of the products. So so far we're very pleased so on the on the one of the biggest benefits of having our own technology that David talked about earlier is the fact that we can build a product that we know consumers will love and the feedback so far.

Our has been terrific. So we have a 4.1 rating across Amazon devices 4.5 on Android and 4.8 on iOS, So coming out of the gate, we're very pleased with that feedback and what are the things that we're seeing from consumers is that many of them, we're already interacting with us before on food network, but.

Peculiar we're looking harder at the feedback from brand new customers. So these are people. This is the first time, we havent experience with food network their ratings or even higher than those ratings I. Just gave your so that's a good leading indicator that we're headed the right direction.

Number two as expected the the star the show if you will is really are alive and on demand cooking classes.

We're really pleased with the engagement so far.

Some of the most popular classes you know what surprised you its Bobby flay cooking pork chops, one of my favorites was Molly a doing fried cheese pickles.

But you know it's a fund product people are engaged they are asking questions or the chefs, it's kind of a unique product in a unique experience and we're beginning to see some pickup across social media of how much people love it.

For those of you who have the App, which I hope as everybody on this call you know we have area.

Alex Gauna, Shelly Mark Murphy, Rachael Ray Jefferies, a curian and Bobby Flay over the next five days Bobby Flay I think is doing three classes on Sunday. So we have this thing loaded with the.

The best chefs in the World.

The consumer demand on the classes has been so high so far the we're actually going to make two changes we're going to expand the number of live classes from 25 per week to 40.

We're also happy to announce the opening a brand new food network kitchen studio in Los Angeles. So we're going to double we have the screwed network kitchen here in New York, we're going to double our capacity by opening up.

Studio in Los Angeles, that'll allow us to serve customers all across the U.S. well, but also allow us frankly to add more and more classes over time. So the live and on demand classes were very pleased with so far and then finally.

As you probably know I think we've talked about this before November December and January are the Super Bowl of the cooking and food season, and we are very excited about the marketing plans. We have you will not be able to watch any one of our networks across discovery portfolio and not see a reference back to food network kitchen, if you.

Happened to be watching food network of cooking channel, you'll see a lot of very direct references to you can go make US right now on food network kitchen. So we're very excited about bad.

Number two David mentioned the partnership with Amazon has just been terrific.

Most consumers in the U.S. will be on Amazon between now and the ended the year as we have this big holiday shopping season, and I'm happy to say food network kitchen will be featured prominently across the site.

And then includes all the exit devices and will also includes.

Very popular fire TV, so fire TV.

Millions of customers right now and if you tune in to fire TV front and center.

Is food network kitchen being featured so we feel like we're we're on the right track at this point and net net we're very pleased with the first couple of weeks the results.

The only thing I'd add to David's comments about the bigger portfolio for direct to consumer is we've publicly announced a couple of things for next year. David mentioned Magnolia. We've also talked about our our factual product with the BBC. We also plan to raw something with cycling in global Cycling network and then I would just add the David's comments.

And say stay tuned because we have a bunch of good ideas and we're going to be pretty aggressive I think coming out of the gate I'll just close with.

A lot of people.

Wonder what was it about this opportunity that drove me from Amazon to come to discovery and I think it's really you know we have the most powerful brands in the world. We have these very dedicated loyal consumer basis, and now we're building products that they love and I think that gives us a chance to really really innovate and.

Right.

So I couldn't be more excited to be here and.

Looking forward to sharing more results as we go forward.

Sorry, Peter can you just elaborate a little bit on the ancillary revenue opportunity the shopping and other at selling other products, whether its kitchenware or other things.

Yes, I think thats up that's something I'd love to talk about more overtime. I think you know we continue to see people using that feature but I'd love to give you more feedback on that and also we've talked about we want to launch in 2020, the ability for people to be able by kitchen, utensils and kitchen equipment as well so I'd love to talk about more more above.

In the future calls but.

Right now you know I think one of the biggest signals. We're excited about as it's very hard to have live classes all over the nation every single day.

The technology has worked outstandingly well you know and that's one of the reasons that I think we really feel like we can scale up the number of classes. We've been did a series of classes last weekend with Molly a in North Dakota.

Life from her actual kitchen, which was just.

Wonderful the watching the customer feedback was incredible. So we're you know we're excited this has a lot of potential avenues for growth and right now we're all in on all those avenues.

Thank you.

Thank you. Our next question comes from Vijay Jayant with Evercore US I saw you May proceed with your question.

Great. Thanks. This is Peter on the phone.

I just wanted to get any sense of sort of the size of your digital opportunity today I mean, you keep talking about all these items on the file that outside of growing but if you had to set up size join deeply PA.

Youre spot on the like excluding your question, let me be how big is that.

How does that sort of offsetting some of the lenient pressures that we have in the business and obviously you have lot of growth coming so any any help on that would be really really helpful. Then probably four foot Gunnar.

Your margins keep going up you know obviously, we stopped talking about synergies the 600 million number it's probably hard to even quantify that now, but how much more room is there.

On just the scripts related synergies going forward. Thanks, so much.

Okay VJ EMEA, let me comment on those so I'll start with your margin point I mean.

As you know we had already guided for.

No margin increase for the third quarter.

Came in and little came in a little better, but I continue to say do not expect further margin Greens, where we are operating at that.

The leading margins and that being said, we will absolutely continue to be laser focused on the efficiency off. This company, we have a lot more initiatives and store, we're continuing to improve our cash conversion.

Center up but as you know we're also looking at.

Number of initiatives on the digital side that Peter just referred to that we won't you funding as we look forward. So.

No more no more margin expansion.

Expected, even though we continue to be Super focused than we had before you get to the next point.

In this area of digital JV, you, you, where the driving force on the join deal on this aggregation strategy in Europe with Paul said, then and us going across Europe , and leading out with deep play in this just talk a little bit about those because those are really is a differentiator, but we see it out David my.

So.

Bruce Campbell was our corporate development were old NBC back in the days when.

10, plus years ago, when we we created Hullo here in the U.S. and we've seen with that has done over the last 10 years and so we not only are believers in the aggregation strategy that power local in that context for the U.S. market.

Well, we know that that can work and it can scale meaningfully and so in a world where a lot of English language international players or as David said spending a lot of money on English language scripted content.

At the end of the day for the last three decades as a company. We've learned that as you go out internationally local is incredibly important.

And while some of those companies may eventually get to that is certainly are investing in certain areas. It's hard it takes time and.

And we already have in many of these markets very strong positions with the leading local players.

And so.

We are we believed that the local strategy is critically important can be very viable and can be a leading video aggregation streaming service just like its proven out here in the U.S. with Hulu and so whether its joined whether start the playoffs.

We have now and you look across certainly the European footprint.

We have the leading position in Europe .

Being able to connect the dots overtime on a leading local streaming services in each of the big markets across Europe .

And it's working it scaling in the markets, we have it and we think that.

These things are hard they're not easy to do but we have we'll track record we have experienced doing them. We have people who know how to execute these deals and then we know how to build right teams and hire the right people to get these up embolic and so.

We think thats a very differentiated.

Approach for us but.

You know is unique to our strategy across Europe .

Okay, and then maybe maybe to the question off the size of the opportunity again as we've said many times for US it's too early to be talking about a framework of Oh.

CNL metrics for you guys at this point, but let me just say we were convinced that it can be material.

We've got.

Super passionate audiences in all of those verticals and as a matter of fact, if you look at our numbers that were reporting this quarter last quarter and what we're seeing for next quarter, we're starting to see a material contributions come through on the on the topline and I only see that expanding.

As we move forward and the other thing to keep in mind is.

From a from a PML perspective all of these.

Verticals that we're talking about half the great advantage against that we're not in the business off 5 million dollar per hour.

Production, but we have.

The benefit of true utility content at.

At very low cost so I'm excited about the opportunity not only from a revenue growth, but also from a from a bottom line perspective again you know.

With that being said, obviously, we want to make the right investments were not managing for margins of the short term.

Paul will manage for sustainable long term set up this company.

Thank you both.

Yeah.

Thank you. Our next question comes from Alexia Quadrani with JP Morgan You May proceed with your question.

Hi, Thank you.

Can you 2020 any sense how much this summer Olympics might contribute and sort of revenues and cost next year end and is that would that be a great vehicle.

Well it picks in general just about your DTC services.

I'd like to have 100%, it's a great year, it's an exciting event, that's a that's coming up and certainly with the the transition.

And Peter have managed for the Eurosport player. It's now in our own tech stack et cetera, So were wearing an attack mode.

Well the player for sure. So it's it's an important the van financially as we have discussed previously remember, we're going to see about 30% off the total.

Total rights costs for the Olympics come through next year. So that is a significant chunk of expenses that as that is going to hit the third quarter and if you keep in mind. The monetization. We're exporting these rights across all the reverse.

Sublicensing advertising.

Affiliate deals and then our own direct to consumer.

Yes so.

Revenue streams are all contributing to the monetization, but obviously over a longer term all the expenses are going to hit the in the third quarter and it's also fair to say that's given US later in the year, we'll have less time into year 2020 to recoup.

Some of those investments because especially if you look at a player revenues from from additional subscribers affiliate renewals et cetera, those are longer term longer term impacts on the topline help us helpful. Having said that.

It is a great magnet for massive audiences.

And attention to the quality of what we're able to do.

With the only company that can have the Olympics and 25 languages.

With with local house, it's it's one of the reasons that the PJ tour came to US. It's the reason why Thomas Bach came to us to innovate.

Was there in terms of innovation last time, we were on every platform and we reach more people under 25 than ever before and we would just getting started JB talk a little bit about how we can use the olympics not just for sustainable growth, which you've done but also to promote a lot of.

These other products called cycling the Eurosport player.

Well I think we'd look at the Olympics as having.

Several different value streams aside from the direct one is that due to pointed out and so two or three that or additional to that number one obviously with the world turning for that 17 day period to to the game is right in advance of also the fall season launches and a lot of our bigger entertainment and free to air markets in Europe , we use the games massively as a promotional.

Nicole to drive our fall season, as our new lineups across the network. So as a marketing push it will be hugely helpful. It was incredibly successful for us as John Chang.

Realizing that count Shang obviously in the Winter Olympics, we're only popular in a fraction of the European caught that were winter sports or more popular. This obviously being the summer is a totally pan European and every market is interested in that so we'll use it from a marketing vehicle for our concept generally the second piece is I think you've heard David.

Previous you say NPL Chang.

Even though it was off cycle in terms of games, probably had a little less visibility because its winter little less visibility because it was.

Chang and not Tokyo, which is getting a lot more because a lot more awareness to it then.

2018 did we draw half a million new subscribers to the player in that period during the winter for now for the summer where the games are popular across the entire continent.

Where we have the only place you'll be able to get all the games will be on the player.

We think we can use that to drive greater.

Much greater penetration for our Eurosport player a product and then the third is as we look at the broader lineup of direct to consumer products that Peter and the team are building whether that be deeply obviously that eurosport player and potentially some of the other products that we are rolling out where the motor tried et cetera, using the Olympics also to drive awareness.

To the rest of the direct to consumer portfolio in trying to drive subs in a broader range of all portfolio. Those are really three major priorities for us as we look at leveraging up is huge abandon the biggest global events in the world.

To drive value for us across our portfolio.

Again, just sort of staying on international for a quick follow up again, given the intent initial success since the launch of taking our kitchen and your expansion plans already in the last I guess, how should we think about the timeline timeline for the rollout in other international markets.

Yes, we.

Our current thinking is regrouping at the very beginning of 2020 in choosing with Amazon Our partners in this.

A few more countries to launch across the world and I think GB and I are very excited about the opportunity.

<expletive> JV mentioned that the previous call, we actually have some food assets outside the U.S. that are quite popular.

That extends all the way through Asia as well in the Middle East and so we're going to kind of take a look at where we think we have the best.

Localized content to leverage already because we like to own our own p. and have a head start and where we can get the biggest benefit from having Amazon and where we think we can serve consumers best but we absolutely plan to roll this product out.

Beyond the U.S. and 2012.

Thank you.

Thank you. Our next question comes from drew Borst with Goldman Sachs. You May proceed with your question.

Thank you for taking my questions.

You know you guys outlined a lot of your DTC efforts that you already have in the marketplace. There's obviously a bunch on the come for next year.

I was hoping that you just taking a step back it.

I want to understand the base of revenue that you guys have now like say this year.

Because I feel like there's still lots services, there and a lot of different segments across a lot of deferred revenue lines, but I don't know if you'd be willing to share just sort of what is kind of the revenue of this broader DTC business globally.

Say for for this year.

Hi, Andrew.

So we we don't break that out specifically because as you say if.

Several contributions and multiple lines of business and the into two segments, but as I said before it's starting to meaningfully contribute to revenue growth.

There has been a for a couple of quarters and I expect more of that next year and just to give you a order of magnitude. It's several hundred million dollars total direct consumer revenues that we already have today.

Okay. Thank you.

And then.

You mentioned that you for the the however, the impact of these investments do you expect to be at the low end of the original 300 to 400 million dollar range. I was wondering if you might be willing to share what you're thinking for next year in terms of kind of an OIBDA impact.

Yes.

Let me, let me take a step back when we find that original 300 to 400 million dollar envelope keep in mind, but all of these individual products were business plans at that at that point. So there's there's a certain amount of.

Uncertainty and we have been prioritizing.

Products against each other and that's why we've thought come in at the lower end up that spend and below.

On 300 million rather than it was the top and 400 million.

As I said earlier, you should expect that in Q4, as we fully get behind that were kitchen from marketing.

Perspective, as well and and all the other products we've got to internationally.

You'll see some more investments come through and it's too early to talk about specific numbers for next year I mean, we're still in the process of budgeting.

But you shouldn't be surprised to see increased investments keep in mind network kitchen is going to be a full year plus you know some some global markets. We've got a handful of new markets coming online for golf.

Your sport player is going to be the priority with the Olympics the play.

It has to have seen a tremendous run extremely successful in terms of.

The subscriber uptake so we really want to get behind that as well and then we've got new products coming to the marked with Magnolia and the around the summer with our factual products that that's in the making so with all that you should assume a little bit of an increase and best sense again too early to talk about specific numbers and then as we've said.

Earlier, as well I want to have the full flexibility to be able to get behind products at work.

Because with all of these product it's the drumbeat that Peter laid out initially focused on the input factors make sure that we have the right product make sure. We're seeing the engagement of first adopters and then ones were convinced that were onto something we really want to be able to get behind.

Harmans marketing and really spending up to lifetime value to to scale those products quickly. So there's there's very likely again going to be built a range as we talk about.

Good way to think about it is.

We're doing a terrific job great leadership team driving down on the existing ecosystem everywhere in the world.

We're on the leading and the performance in terms of our ability to go we're growing ratings outside the U.S., our ability to commercial monetize that our relationships with distributors the ability to launch new channels everywhere in the world when no one else can.

So the existing ecosystem, where we're very effective and we're driving hard but what you're seeing now is what Matt. We're mounting a massive attack with all this IP has artillery and everybody else because everyone should have our content so whether its food network kitchen, whether its golf, whether its eurosport player whether.

It's motor trend Magnolia those are those are silo passion, driven attacks and deep play across Europe is picking up.

Everybody everybody that doesn't that doesn't subscribe to cable and those that do subscribe to cable with with SBO DNA by products and that's what we're looking at in the U.S. as stepping up a full on attack Mount and attack with our differentiated content against that to serve.

Super serve and serve.

Viewers and people that on phones and people that just love the characters in content that.

That we have.

And that delight and the fact that we're differentiated.

Everybody knows who we are we don't promote ourselves because we have a show.

Fair enough to tell everybody can watch a show.

They want to come hang out with the characters we have in the brands that we have and so we're starting we're looking at things very differently because the the passion for us as a as a as a group of IP.

Seems to be very very sustainable in stroke.

Yes, and I assume David when you're talking about seems to be like taking your channels and offering a suite of direct to consumer suite and I just want to confirm I assume you wouldn't say this but there's no can track show restrictions with your current MVP de partners in terms of content or anything that would.

Restrict your your decision, making or your ability to do something like that just to confirm.

We have an ability to do whatever we want but we're probably the most we've been the most friendly company in terms of the existing ecosystem.

And we're looking to continue we're talking to existing distributors were in the marketplace. We started by talking to customers about their confusion about all these offers of what scripted series should I watch now I got 20 of them in in the Hopper and we're finding some great information about what we haven't how valuable it is and the we're now and we're now trying to value.

Await the best way.

We want to preserve the either the existing ecosystem.

And we think that we have an ability to also attack everyone that doesn't subscribe to cable and have them have an opportunity to watch the great content. They grew up watching.

Great. Thank you appreciate it.

Thank you our next call.

Question comes from Steve call with Wells Fargo. You May proceed with your question.

Thanks, and I joined a little late so apologies if I missed this.

You got now all these digital initiatives and they're sitting nicely under Peter I was wondering if you think theres a point in the future since it's such a broad portfolio that you might be able to give us some some sort of goalposts or like a revenue range of what you think beef can do.

On a run rate basis, and then on the buyback side I was just wondering how we should think about it do you think about this is now sort of a structural thing where you can generate a few billion dollars a year in free cash flow. So theres always going to be a couple billion dollars a year that you can use to buyback stock now that you're at this level of debt or is it more opportunistic.

Than that and just last one unrelated to free cash flow next year or the Olympics a drag on free cash flow are they just a drag on not even dominated in the summer. Thank you.

All right. So let me, let me start with the with the digital initiatives into Goalposts I understand the desire to get.

As much of a modeling framework.

Possible as I've said many times before.

We want to maintain flexibility right now to try things add to fail, we have to fail or to get behind stuff, that's working and as Peter said, we're really focused on input metrics rather than trying to chase.

Metrics further down the funnel, albeit subscriber numbers or.

Let alone a revenue and profit numbers. So thats why it is very early the other thing is wanting to keep in mind again. This this business drives our two reporting segments. The U.S. nets and that the Eni segment. So theres always there's always that element that these businesses are all.

Got it and in our regional structure now that being said I I do think and again, it's a little early for that but I would expect that as we as we go through next year with more product launches.

And add more.

Let's say track record on existing products that we will increasingly start giving more to smaller here up again I don't think it would be helpful. Right now to get too granular and it wouldn't be responsible either because again it's.

Very early days.

Number two on the buybacks look I mean.

We've been we've been saying the same thing.

The longest time now and our priorities haven't changed we are now at 3.1 time in a very soon we'll be at the lower end of our target range and again I do continue to want to take advantage of our balance sheet here.

And we're funding all the investments as you as you could see.

And our numbers here.

We will continue to look for for M&A opportunities, but have you all know that that's easier said than Don we would do another scripts acquisition any day, but theyre, they're they're not that available and to be honest with you. If I look at the buybacks that we that we executed last quarter those are going to be great investments and and honest.

Lee.

Investing in our own stock since the very very high bar or or every M&A activity. So this idea of investing in ourselves.

Through buybacks or you through.

Funding organic investments on that need to see side.

It's going to is going to be priority.

Thank you.

Thank you. Our next question comes from Doug Mitchelson with Credit Suisse. You May proceed with your question.

Oh, thanks, so much a couple questions David.

I mean, you're mentioning what sounds like a pretty remarkable strategic shift with your direct to consumer strategy in the U.S. So I was hoping for some more clarity are you talking about taking.

A library of content and going direct to consumer are you talking about actually taking your current content on a life networks plus the library going direct to consumer are you talking about doing this in combination with other content companies or leveraging other platforms like peacock or is it something that you would do yourself.

Well look what we're doing as well looking at the strength of our IP in the us in the aggregate and we're looking at.

In talking to consumers how much they love it we see through our goal platform how young the people that are using it and how much time, they're spending with it and we're now looking at what how do we take that content. We're already doing it independently is there an opportunity for us to take that 10 on a broader basis.

To reach.

To mountain attack on those that are not existing cable subscribers.

That's the full ecosystem. That's what everyone is trying to that's what everyone is looking to do and needs to do which is take the great IP and reach everyone. We want everyone to watch our cut.

And we can do it the way we did it in Germany.

But candidly we haven't wanted a partner in the U.S. because all those at the payment platforms don't have enough they have spoken to us.

And we look at what they have is differentiated they're part of an overall entertainment pie and.

They each have a piece none of them have at all we have almost all of each of our platforms. When we put it together we have something that's compelling and so we'll be looking at that over the next few months.

Very interesting and.

Good or you are threatening to continue to de lever, but theres only 10 basis points left to go and you just talked about capital deployment a little bit.

If you're doing close to $3 billion or free cash flow next year, and you're you're basically at 3.0 times as you and this year it sounds like either that's going to M&A or capital returns. The only other thing that would be an input in the model is if you were investing so much in digital initiatives like the one David's talking about that EBITDA would be pressured.

And that some of that cash flow would have to go do to pay down debt sort of thinking about all that right and as that last scenario in play.

Well I think you're thinking about it right, but let me let me make one thing very clear I don't see any scenario, where we've been spending that much and Peter as investments here that there will be a really material impact our free cash we will prioritize those investments but does not.

One of the reasons is that if you think the jewel for HBO is game of Thrones, our Joel on food network kitchen might be Martha Stewart cooking for Thanksgiving or I'm, just looking at doing alive couple of class every day, we find that they really love Martha They really love Bobby.

Then we can now we don't have to wait a year and a half a dozen cost us $8 million an episode. The next week, we sit down or everyone working with us having a great time.

And even with our existing content. Our average cost of content is has stayed relatively flat in some cases, we've been able to maybe do a little bit better.

But at our average cost the content is half million dollars an episode.

Sunday Night, we're generating a three five on on.

With 90 day fiance on TLC and cost of that content is it's the number one show on television on Sunday Night and of course that content has actually less than that.

I think the other thing Doug as JB I think the play in the traction. We've had internationally has also open our eyes a little bit. So the fact that we all focus in particularly obviously for the U.S. focus on what's happening to the pay TV bundle and subscriber loss I think that's the defensive way of looking at the offensive way look at it which is what we've seen internationally.

Is there is also a enormous and in some markets obviously like the U.S. growing percentage as base that has never doesn't have access to our content or is choosing not to have acts and yet would love it and so when we look at a market like Italy, which essentially has more than 70% of the population has not signing up for pay TV as we velocity playing that.

Market, we realize.

Rather than just holding onto the to the 30% penetration of pay TV, we got to get much more offensive about going after the 70% that never has had it and that's a whole new target base that as we're seeing early numbers.

Looking at our content and saying, we'd love to have this and and so that's that's an exciting way of looking I think part of what David is referring to in terms of us looking at the U.S. market and having sort of that same question. The let just one point on the current ecosystem.

Charlie announced this morning.

That he added 150000 subscribers with 214000, sling subscribers, which is a skinny bundle.

And we are on every skinny bundle, we happened to have very good carriage on on both of the sling platforms, which I don't know that anybody else does.

So we will be the beneficiary of that but it's a directional point 214000 subscribers.

And.

They don't carry any regional sports charge that we drill sports on slate.

You talked about this overstuffed.

Bundle Retrans sports networks regional sports networks, it's all waiting down this industry and his Charlie he just he just takes the regional sports code off.

And he picks up 214000 subscribers.

And if you take if you take one of our distributors out there has been working on getting rid of nonperforming subscribers and you see eight aware were slightly down we may be flat. So I don't know if this is going to be a pivot, but if there's a skinny bundle that can get some acceleration than we are seeing a rotation into some of these what I would.

Call a MPPD piece, we have very good carriage on all of them better positioned than anybody in no. Maybe this is.

A moment, where the U.S. can if the if the existing distributors can get some courage.

I think and start to benefit to consumers, which is hey, I don't want to pay a $100 and get all these regional sports networks I don't want to pay for all the sports.

Just want some great content, that's what I spend time watching.

So I think sling is very encouraging and it's a good mark for the industry stop stuff in the dam bundle.

Served the consumer.

Excellent.

Alright, thank you.

Thank you and or last question comes from Michael Nathanson with Moffett Nathanson you May proceed with your question.

Thanks, Alex couple of for JB I, just wanted to to learn more about how you think about what markets do you partner with the local broadcaster or we go it alone and and in those markets. What have you learn how necessary is maybe the local content of versus your stickier just cover your your products to do play mode.

Yes, So I think our view is generally in that as sort of David referred to in the in the pull an example.

We think the faster and more local.

Aggregation can come together, the better and so in that market, where essentially between us and all set we have about 70% of the of the audience share in the market.

I think that that sort of answered the question of we view that even though we have we are the largest broadcaster in Poland. As an example, and we do go it alone and we're seeing traction in growth on our all in we think that making it easier back to what David just said about lead with the consumer that simpler we can make it in aggregating content in a good.

Good experience for the consumer wins.

And at the end of the day, even with a 30% share audience plus in a market. If we can partner with another big or one or two big players that have meaningful share and make it even easier with more great content. All locally differentiated that that is always going to be the better approach, whether we can get that done in every market look.

Obviously is something that's a work in process, but I think as broadcasters around the world are realizing that the model has to change.

And that their future is going to be entirely based on how quickly and how well they can pivot to the streaming world.

The good news is discovery with our track record of putting these partnerships together.

One thing these products scaling these products out were our unique partner and the most credible partner and then as long as markets to pull it together.

Okay. Thanks.

Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.