Q4 2019 Earnings Call
Ladies and gentlemen, please standby your conference call, we get momentarily. Thank you for your patience and please standby.
[music].
Ladies and gentlemen, thank you for standing by and welcome to discovery full year in fourth quarter 2019 earnings call.
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After the speakers presentation, there will be a question and answer session.
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I like to hand, the conference over to your Speaker today, Mr., Andrew Slaven Executive Vice President Global investors strategy, Sir you may begin.
Good morning, everyone. Thank you for joining us were discoveries fourth quarter 2019 earnings call.
Joining me today or David Zaslav, our President and Chief Executive Officer, Gunnar Wiedenfels, our Chief Financial Officer.
Baby, Brett President and CEO discovery networks International and Peter Paris, He CEO global direct to consumer.
You should have received our earnings release, but if not feel free to access it on our website at <unk> Dot discovery Dot com.
This call will begin with some opening comments from David and sooner and then we'll open the call for David Garner JV and Peter did take questions.
Before we start I'd like to remind you the comments today regarding the company's future business plans prospects in financial performance. Our forward looking statements, we make pursuant to the Safe Harbor provisions. The private Securities Litigation Reform Act 90 95. These statements are made based on management's current knowledge assumptions about future events. They involve risks and uncertainties I could cause actual results to differ.
Purely from our expectations.
Body projections or other forward looking statements the company disclaims any intention or obligation to update them for additional information on important factors that could affect these expectations. Please see our form 10-K for the year ended December 31st 2019.
Couldn't filings made with U.S. Securities Exchange Commission, and with that I'd like turn call over to David.
Good morning, everyone and welcome to our Q4 and full year 2019 earnings Conference call.
We delivered a quarter and here about standing progress.
For 2019, I'm pleased to report that we met or exceeded all of our core guidance metrics and strategic objectives.
And we feel terrific looking ahead into 2020.
We continue to deliver on the many promises we made to our shareholders over the last few years.
Promises made.
Promise is capped.
On free cash flow, we set a goal of 3 billion for the combined discovery in scripts.
And this year, we over delivered with 3.1 billion free cash flow, which is even more impressive given the substantial direct to consumer investments we're making.
We are free cash flow machine.
I said when we closed on scripts that free cash flow will be like a mode in turbulent times.
The 3 billion plus a free cash flow like bullets, well weapons that we could use.
Promises made promises cap.
On leverage we had promised to bring leverage down from 4.8 times following ordeal to our target range of three times to 3.5 times by the end of 2019.
By the end of Q4, our leverage was all the way back down to three times.
In large part driven by the 1.1 billion in free cash flow that we generated in Q4 alone.
Promises made promise is capped.
We expressed our strong desire to return capital to shareholders.
Once we reach our target leverage range.
And then only 10 months, we've exhausted our initial 1 billion authorization and we are reloading as our board just approved an additional $2 billion authorization.
Promises made promises cap.
We identified international expansion as a key upside opportunity for us scripts acquisition.
This year, we expanded distribution of our lifestyle brands to an additional 100 million new households.
Across both free to air and pay.
Food at home content and channels supporting our significant international growth in 2019.
All of which speaks to the truly unique position we enjoy within the industry.
Supported by the best and most stable management team in media today.
We continue to deliver consistent execution, even in the face a rapidly changing ecosystem.
The U.S., we delivered solid advertising growth in the face of difficult domestic ratings trends and 5% domestic affiliate revenue growth was supported by our broad coverage across the virtual M. B P D landscape.
With better carriage more broadly and virtually any other media company in the U.S.
International advertising revenue growth of 5% was in part driven by continued strength in our commercial share.
Well International affiliate growth once again achieved double digits.
The underlying tailwinds for both linear and direct to consumer.
In 2019, we also accelerated our direct to consumer pivot with a focus on two key pillars.
Number one.
Big scalable view products like all abroad aggregated apps in Europe.
Deeply.
Fine.
And the TV and player.
These are local language local sports who likes platforms.
We are seeing superb and very encouraging momentum an acceleration in trends in this space.
The key to these over the top products.
That their local local local.
In addition, we have our best in class aggregated go screaming apps in the U.S., which continue to grow quickly.
And show meaningful scale growth.
And as we've mentioned previously.
We are focusing hard and aggregating all brands into an OTI T. service here in the U.S.
A major focus for our management team and me as we look to reach all passionate fans across all platforms and methods of distribution with our great IP are great characters and our great stories.
The second key pillars is our growing affinity you wouldn't do products focused on our passion verticals like food sports and lifestyle.
Much of the content on our view and do platforms have largely been amortized and afford us an incremental monetization opportunity second bite at the Apple.
Also encompasses our short form strategy with our group nine investment.
And they're strong affinity brands like now this the dodo.
GAAP sugar.
We like our hand in this rapidly evolving ecosystem.
Total conviction on the simple, but valuable principle.
What insys Lamar content.
And now just want to see it on all platforms.
The landscape that is emerging plays to our strengths into our strategic advantage.
We generated over $700 million of Nexgen and direct to consumer revenue 2019.
And our well on our way to exceed 1 billion in 2020.
Representing a major milestone for us.
And it underscores the solid traction we are seeing across all components of our strategy.
Our organization is more a line than ever around this priority.
Starting in 2020, a significant percentage of our employee incentive compensation across all levels and rank will be measured by how well we perform against our nexgen and direct to consumer goals.
Whether measured by our vast library 60000 hours.
Nearly two times the size of Netflix.
Our current pipeline of 8000, new hours, we produce a year.
Well the milestone, we crossed and held for more than half of last year.
As the number one most watch portfolio in the United States for women across all of the television.
We have a very strong portfolio brands that are consistently ranked at the top of consumer preferences for branch strength and loyalty.
We have passionate super fans.
Dentek talent and characters.
Our loved the American around the world.
Oprah shipping Joe the property brothers Guy Fieri, Bobby Flay, we could go on and off.
And we're not a renter.
We own and control almost all of our IP globally.
We will continue to serve viewers within the traditional linear ecosystem much like we've done for decades.
And we now serve them better than anyone within the virtual M. B P D landscape.
Well, we are more widely distributed than any of our peers.
And we serve them within authenticated go up.
The average age of more users are below 30.
We also believe aggregate content is very strong on a standalone basis.
And in addition would be a great complement to the many other scripted anybody SBO deep platforms that are already in the marketplace. We're differentiated.
And we fit well with old.
And of course, while being mindful of the balance in importance of linear pay TV business, we're positioned to create dual revenue stream direct to consumer platforms, and we continue to evaluate the possibility of offering an aggregated platform all of our channels brands and personalities quite possibly.
With the help of any number of distribution partners in the U.S. and around the world.
We believe there were a number of direct to consumer business models that are scalable.
Stay animal economically and rational from a cost perspective, as we expand and complement the linear ecosystem.
And evaluating this opportunity set the strategic imperative for our leadership team.
As we sit through the analysis, we are confident that we are playing a different game than everyone else.
The efficiency of our content is unparalleled.
Our content costs are under control.
And for our affinity fan bases, we are delivering them truly coveted appointment viewing.
But the key variable that I keep coming back to that distinguishes us from our peers.
It's not only the great storytelling and brands and characters, we bring to our fans.
Storytelling in brands that drove more female viewers to our portfolio and any all their for more than half of 2019.
But the economics of our model.
Our content is a small fraction, what's taking place on the other side of the ledger.
The overbid competitive spiralling out of control costs, the scripted new and repeat is astounding.
That is not who we are.
We aren't paying hundreds of millions of dollars for content original or repeat that we can't even though.
And accordingly, as we begin to scale our products to millions of subscribers will see profitability very early on.
Take TLC is 90 day fiance.
It's a great example of what I've discussed it is the most watched program on Sunday night in all of television among all key demos and consistently out delivers each and every single broadcast network in women 25 to 54 in prime.
And we now have 90 day in spinoffs dominating TV on Sunday, and Monday nights, almost all year.
In a cost per episode that is 110.
The cost well the scripted series.
In addition, the 90 day fiance franchise now airs across 170 countries, making it one of our top rated shows globally.
The power fully owned global IP.
Outside the U.S., we're very excited about the success of our locally differentiated who like products such as deeply.
These assets are becoming a meaningful part of our strategy in many key markets our JV in Germany join.
Cost 7 million monthly average users only six months after the launch.
And we recently added and that's spot tier.
Underpinned by ambitious plans for 12, new an exclusive series this year.
In German language local.
And we plan to combine and launch our TV and player with Paul SAP to create the preeminent destination for Polish language content in this important and our largest European market.
We're actively exploring additional opportunities to expand our model to other major markets in partnership with local programming leaders, perhaps another JV type models. We believe we offer a winning solution for incumbent broadcasters to a line and create compelling packages for consumers.
You should expect that we will accelerate OTI t. services.
Such as our Standalone aggregated app in Europe.
2020 is going to be a year, we really begin to fuel what's working.
Well, we believe we have a strong hand to play and deeply is one of those key areas for us.
Expect us to play a bit more offense in select markets, particularly where consolidation and distributors means we have to push harder to get full value for our richer content portfolio.
One such market, where this is taking place is in Denmark.
And we are pushing ahead for more aggressively with our OTI t. solution.
In some countries like Sweden for example, the play will be the only place fans can watch all sponsoring.
The local Swedish football League with 200, plus games, it's must have and compelling content in the marketplace.
And in part the reason why de play continues to be the fastest growing SBO de service in the Nordics.
Local entertainment local sports, it's a great combination.
We intend to push the play expansion to nearly doubled the number of markets over the next year.
From 10 markets currently supported by robust technology platform, an exclusive local content.
It's likely we'll see some near term impact as we accelerate its push.
The cadence of affiliate fee growth become a bit lumpier during this process.
However, we are confident of the longer term financial and strategic payoff.
And keep in mind as I said earlier, our costs and margin profile will enable us to achieve our financial goals at much lower subscriber levels than many of our leading DTC player competitors.
And our affinity view and do platforms are completely differentiated from the intensely expensive and competitive fight taking place on the scripted side of the industry.
Food network kitchen continues to ramp up very nicely.
We and our partners and Amazon are.
Our pleased with the very strong engagement product ratings and functionality of the service.
We recently announced a great distribution arrangement, which sort of let Tom.
Here in the U.S. opening up food network kitchen to an incredibly targeted audience base.
And stay tuned for additional distribution and marketing pushes that we have in the works.
For your sport, we are within six months of broadcasting our second Olympics across Europe and across all screens.
This is our first summer games.
And we'll have three times as many events as the winner.
Our teams have been hard at work preparing for the challenge we're excited to out deliver the amazing set of games, we delivered in 2018.
Supported by vast improvements in our technology programming expertise and the delivery platforms.
To finish it is an unprecedented time in our industry.
Not only as measured by the magnitude of change.
But also by the speed of that change.
We feel confident that our strategic agenda.
We are one of the few media companies that own almost all of our content globally.
Combined with the strength of our brands in connection with passionate audiences.
All position us well.
A long term sustainable growth.
We are singularly focused on strong execution and operational discipline.
And I always guided by an entrepreneurial zeal that got us to where we are today.
This work continues to fuel our strides in building the next generation of growth for discovery as we position our business within an industry undergoing generational transformation.
I'd now like turn the call over to garner.
Thank you David I'm very pleased to present, our financial results were 29 team and I'm confident in our financial position as we tackle a very exciting global agenda in 2020.
Indeed, generating over $3.1 billion and free cash flow during 2019 after funding approximately 300 million U.S. dollar growth investment nearly 67% conversion of value. It up is emblematic of both the cash generative capability of our business model and truly differentiate a level of efficiency with which we are operating.
During our scripts marker and we will maintain that laser like focus on cash and efficiency, perhaps most importantly, or free cash flow underpins our ability to address the exciting opportunity set that David outlined.
And to continue investments to support or traditional linear networks. When at the same time return capital to our shareholders, particularly given that our leverage is comfortably within our target range.
To that and I'm pleased to report that we have already bought back $1 billion in stock and we take aren't boards, New 2 billion dollar authorization has a strong sign of support for the initial momentum were seeing as we laid the groundwork for our future growth plans and we are excited about what we're seeing across our portfolio of next generation businesses.
Which include our direct to consumer businesses and the digital element of our traditional business like or go products.
With this portfolio, having already generated over $700 million in revenue in 2019 and being on track for at least 40% growth to over a billion dollars revenue in Twentytwenty approaching 10% total company revenues, we're very pleased with the early traction.
Over the course of this year, we plan to supercharge or expansion of deeply in Europe positioned additional direct consumer initiatives, such as Magnolia ready for launch.
Aren't lighting up or BBC natural history content in multiple formats across the globe significantly broadened the rollout of within Kay and drive improvements and expansions across our entire portfolio to that and we do anticipate spending more against these initiatives in 2020, which should lead to a roughly 600 million dollar annual investment in the sense of short term you know losses from the.
These growth initiatives, representing an incremental 300 million over 2019.
It is worth noting that we currently expect these investments to peak towards the end of Twentytwenty or early 21 at the latest.
The year over year ramp up for these growth initiatives is primarily driven by original content and marketing cost to drive subscriber growth healthy portion of which the success based spending.
We will also largely complete the initial investment in our own technology stack as well as further round out our management team under Peter all of which should scale nicely as the business grows.
Also it is important to note that excluding the step up in expenses from our next generation and D to C initiatives and be Olympics or core expense phases plan to continue to decline, which again speaks to our resilience on expense management and high level of operating efficiency.
The contribution from Nexgen in direct to consumer well certainly helped drive an acceleration in our overall global revenue in Twentytwenty well. We currently expect solid mid single digit revenue growth on a constant currency basis over 29 team.
Now this is our outlook as of what we see today and would expect in any business as usual environment clearly given the news flow around Corona virus being a consumer facing company, we'll have to carefully monitored.
The other key item I'd like to review in more detail is the Olympics in Q3.
We will produce our first summer games from Tokyo scheduled to take place from July 24th to August nine.
We take a minute to provide some color around the games looks like the Winter Olympics that we produced in the first quarter of 2018 is something about which were very excited.
We continue to expect the Olympics to break even over the life the deal with monetization and exploitation of rights occurring before during and after the game.
Key revenue drivers will again be sublicensing, which will be reported in other revenues comprised the vast majority of Olympics revenues in the third quarter.
Advertising, which is tracking well with significant uplift versus the 2018 winter games.
And distribution, which includes both traditional affiliate revenues as well as D to C revenues generated on deeply into Eurosport player.
Recall, we saw healthy uplift in the Eurosport player subscriber base during the 2018 Winter Olympics with the transition to our own and more effective tech stack, we expect a fair even better through these games.
And as a reminder, we expect the entire set of rights fees and production cost during the period in which the games our air. Despite the fact that some olympics related revenue will be generated post the games.
Accordingly, like with the winter games in Q1 of 2018, we expect to incur an Olympics driven you bid on loss in Q3 that will normalize in future quarters.
We expect the Q3 loss to be in the $175 million to $200 million.
I'd like to shift to providing some commentary about the outlook for the year as we look across our key operating segments.
Like last year were not providing full you're a little bit up and free cash flow guidance, though I will describe a number of key factors quantification of the one off items headwinds tailwinds building blocks et cetera.
To help you understand the cadence around the moving pieces.
Turning to segment drivers on the domestic side advertising will continue to be impacted by underlying trends within the pay TV ecosystem.
We continue to fight the uphill battle with cord cutting in court shaving as well as declining pumped levels, which ultimately lead to lower audience delivery.
And while our very strong yield and the strongly growing contributions from our goal business have more than offset these trends rating headwinds at some of our key networks have put additional pressure on recent results.
All of which though is fortunately taking place in what continues to be a healthy marketplace for TV advertising two months in we're forecasting slightly up and as always ratings trends will determine where we land.
With respect to domestic affiliate, we're coming off a very strong year and we feel optimistic heading into 2020, we remain the most widely distributed network group in the industry, though as you all know we began to lap inclusion in who and slowing in the fourth quarter and we'll lap you to TV in the second quarter of 2020, which places us more in line with the broader industry trends.
As we've noted previously.
Visibility across this revenue line is also very much subject to shifting consumer patterns in an across different bundles and services as opposed to pick up of the to see subscription revenues near term, we would expect at least no single digit revenue growth from domestic affiliate.
Turning to international current operating trends and the outlook within advertising remain similar to what we have seen over the last few quarters on a constant currency basis or continuing commercial share growth across many countries impart from broader distribution allscripts counted internationally continues to support a positive international AD revenue story more.
Home attraction from the advertising side or nexgen in direct to consumer products continues to provide additional tailwind also please recall, we will lap the consolidation of UK TV in the second quarter of Twentytwenty.
And on the international affiliate side as David discussed there is always a number of moving pieces chief among them as our desire to accelerate the penetration of deeply which is finding very solid footing across its growing number of market.
At the same time, we are in some cases pivoting to hybrid model with some of our distributors selling on both the wholesale b to b bases as well as the B to B to C retail basis, while at the same time driving direct to consumer as David noted in instances, where we had to push harder to get paid full value for our content. We have held firm much like we did in 2017.
Number of countries, leading up to the 2018 winter games, we now can and will take a more aggressive stance with a far faster pivot to a direct to consumer model, which we believe is ultimately the stronger move strategically. This however will naturally create some near term impact on our segment revenue growth.
And as a reminder, Q4 2018 provided the slightly easier comp benefiting or 10% growth in fourth quarter of 29.
To that end, we expect that near term an annual international affiliate revenue will grow modestly slower and twentytwenty compared with a constant currency revenue growth of 5% 29.
As many of our growth initiatives evolve and become a bigger part of our overall revenue and as we prioritized investments between the individual initiative the balance of advertising and subscription revenue will evolve as will the cadence of expenses and the mix of domestic and international against this backdrop you will have noticed that we are providing slightly less precise.
Detailed quarterly guidance revenue line items.
Where I have come to the conclusion that they would be much less helpful. At this point than in the past.
Turning to free cash flow.
Which continues to be a top priority for us and Twentytwenty.
We expect another year characterized by a very strong EBITDA to free cash flow conversion rate and the 60% range give or take.
As discussed before the Olympics or a cash outflow in 2020.
We expect cash taxes to return to more normalized levels. This year and will be up year over year to the low 20% range, excluding PA amortization.
Capex is expected to be more or less than the same ballpark as last year as we continue to invest in number one or growth initiative number two global software and infrastructure spend gear to productivity and cost efficiency and number three the final buildout of our global headquarters.
FX is again expected to be a headwind both on revenue and a little bit on twentytwenty, roughly a negative having 20 million dollar impact on revenue and a negative 60 million dollar impact money over though.
On the balance sheet, we will remain comfortably within our target range of three to three in half times net debt over a little bit up.
Well, we're currently at the very low end of that range with some of the Lumpiness to argue it up particularly around the third quarter impact with the Olympics and continued share repurchases our leverage multiples for increased modestly to around the middle of the range. This year.
And keep in mind that given our normal seasonality and with the Olympics in the third quarter of this year or free cash Logan generation will be somewhat lumpy in skewing towards Q4.
Uses of capital have not changed we will continue to look for opportunities to invest in organic growth drivers and where it makes strategic sense, we will look at accretive inorganic opportunities as well and as we are where we want to be from a net leverage perspective, we largely expect to return excess capital to our shareholders.
As we progress to peak next generation and direct to consumer investments and the Olympics from a high level and without getting too far ahead of ourselves 2021 should have a far more normalized cost curve, we will comp against the Olympics, while still enjoying Tailwinds from Olympics related revenue post the game and we should grow into and begin to scale.
Our next generation and direct to consumer content and technology expense structure, all else being equal we should enter 2021 with a certain amount of momentum.
In closing, let me reiterate my key points since closing the scripts deal we have relentlessly executed our agenda and achieved our strategic and financial objectives evidence among others by our industry, leading distribution share growth in international and record free cash flow generation and we have every intention to continue on this path.
And overall, even in the face of the secular headwinds facing discovery in our peers, we expect our consolidated revenues to grow solidly in the mid single digit range. This year on a constant currency basis.
Within that growth, we're seeing healthy traction of our next generation direct to consumer businesses with associated revenues expected to grow at least 40% to over 1 billion in 2020.
Expecting to hit peak BNL investments related to our growth initiatives around the end of Twentytwenty, we're set to gain significant operating leverage in these businesses from 2021 onwards.
Finally, our board continues to express full confidence in our ability to execute on our agenda and underpinned by the new 2 billion dollar buyback authorization I am convinced this is a great value creation opportunity at these current share price levels with that I'd like to turn it over to the operator to start taking questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one.
Your touched telephone if your question has been answered or are you wish yourself from the Q.
The pound cake once again, ladies and gentlemen to ask the question. Please press Star and then one now.
And our first question comes from Steven Cahall from Wells Fargo.
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Thank you good morning, and thank you for the color on direct to consumer with the revenue numbers you talked about peak spending in 20 to 21. So just wondering if you have an estimate as to when do you might get a breakeven on the next gen portfolio and Relatedly I was wondering if you could tell us at all about the launch of Magnolia and aside.
It's the nature platform at the BBC Magnolia, just gonna be I try and do element a lot like food network kitchen and on science in nature do we have any idea in terms of price side, whether that's going to be S. Theo D versus Avon and then I've got a quick follow up thanks.
Thanks Steven.
Well first on on the BBC deal.
When you put together their library with ours, we really see it as the definitive collection of science and natural history, and you know as iger when after the big brands. What he did Marvel you think about the big brands, we have the overwhelming majority of of nature in science and and.
And the big brands, whether its planet Earth frozen planet walking with dinosaurs Blue planet and everything that's produced.
By us and the BBC under those names for the next decade and so.
We think that that could be quite compelling and what we're looking at is we own that globally outside of.
UK and China, There library, we do we go globally with this family product, which we've been getting a lot of data on which looks quite differentiated and very compelling or in some cases that we put that together when you think about what we have here in the U.S.
Where for a big portion of last year, we were number one in America.
For women, beating.
Every one of the media companies.
And the quality of our brands that we put those together and as we look at the marketplace. We see that a lot of these SBO de services scripted series scripted movies competing with each other look an awful lot of like a lot of the same movies on them.
And people are going to be looking to figure out.
What kind of what can I have an addition to that those that are are not on traditional cable that will that will provide a real package of content that they love.
And that they know how to cure rate.
And Curations gonna be a big issue with a lot of these SBO de platforms and is one of Netflix Big advantage is is that algorithm, but people are still confused what should I watch next and when you take a look at us discovery, and and and BBC or discovery at planet Earth and those logos and if you look at what Disney.
He is doing and then you see Oprah and chip and Joe and food and age GE and TLC and I'd.
Most people would take a look at that and they seem to be saying well that's all my favorite stuff.
And they feel great about and so that's what we're looking at and that's what we're looking at globally do we aggregate or do we do we go into the the silos that Barry.
Powerful superfans silos, like golf and cycling and we'll be making that determination soon.
What we think the caught this combination of incredibly high quality content for women that they love and know how to navigate with great characters and brands together with the definitive collection of science a nature.
In my generation or whether it was world book or Encyclopedia Britannica, No kitchen go to college without watching.
The majority are a lot of that stuff.
How compelling could that be and what would the churn on a product like that bay and that's what we'll look at it.
Oh, yes, Magnolia, we're going to launch the channel itself.
Chip and Joe doing great.
We've been we've greenlit a load of content, they're producing all of it.
Out of Waco, we have a huge team down there and they're producing a lot of content, which they're involved indirectly and we're we're going to just make the determination of when we do the direct to consumer and how we aggregated.
And we'll do that soon but right now the content looks great chip and Joe's popularity of never been higher and their super excited and well get non terrifically well.
The one thing just to add to David's comments on BBC caught that as we are as he said as we're looking at experiment thing and when we pulled together either for the U.S. how the market. We are already beginning to experiment, but the internationally where we're launching.
The BBC content on D. play and seeing how that's going to drive the bigger package and so we are already making use of that content in Europe.
As of now.
Okay, great on the.
The break even point Steve.
We're not a position that we ever model, but I'm certainly not going to talk about.
Break even or margin profiles at this point when the middle of the board transformation, but if you look at.
You know what we have said, we're seeing traction on the revenue side, we are expecting or investments to peak at the end of this year. So that gives you a bit up a sense for for what the model might look like and and keep in mind, we have very very strong economics with our content in general it works very well across platforms and as as you think about.
Our rollout of the direct to consumer products.
Content is one of the big cost line items, that's going to scale very well because it's a fixed cost component and the money in many cases, we can leverage off of existing linear content number two is the personnel cost Peter has been starting to put together a great team.
We do expect additional ramp up personnel expenses this year.
And.
From that point on.
It's probably going to plot tall, because we're we're leveraging that same team across across what we're doing and then you've got that big point of marketing expenses, which is going to be too a lot and success success based so.
It's important to know what we are striving to get.
These two products as successful as widely distributed as possible, we really don't need a crazy number of subscribers to be to be operating a profitable business here.
The key point again, as we're leveraging up all of our massive library 300000 hours of content in general.
60000 hours that are currently our goal platforms that were actively.
Using here.
Some of that's doing much younger than our linear networks. So again bottom line is I think we have one of the strongest economic positions for the roll off.
He's product.
States you only model will give more color as we go along you see on the scripted series scripted movie side and that very competitive environment.
Next the with with big battles for extra nourishment.
Think of the scale of what we have in terms of the ability to to nourish subscribers domestically and internationally because that content is not only in English. It's in every language.
Great. Thank you.
Thank you. Our next question comes from Michael Nathanson from Moffettnathanson. Your line is open.
Thanks, I want for David and I want for good or so David when you think about the aggregation opportunity within the U.S. if taking all your content all your brands.
Into one over the top product.
A question I'm happy with how do you balance the opportunity to actually find people outside the bundle with your need to keep your distributors happy like you see what's happening with H. Veo, Max Showtime, where they've pissed off distributors, who no longer support their products or how do you you balance the opportunity that you see or to get people outside the bundle but.
Also keep the economics of your relationships intact. That's one question here.
Well first we're delivering 20% of the audience and we're not proud of this but we're getting less than 5% of the money, so and they're selling in our channels and our channels have great affinity and and very good CPM opportunity for appetite for the cable guys. So we're in extremely good value, which what which were trying to.
Push on and and advance but were in extremely good value number one.
Number two.
But probably the best actor in the industry.
When you look around we're not selling so far best IP, you know no one's waking up and going Oh, you soldier you sold your best IP to Netflix.
You sold your best IP to Amazon, We don't do that and we walk in and talk to our distributors there like what's going on why people doing that why are they taking great content off the bundle and getting try to get short term economics, we're not doing that which gives us a real equitable position and we have great relationships with our distributors. So we start with them.
I was talking to Rutledge last night.
And you know we're in discussions with all of our distributors beat the Gulf platform is a great example, hundreds of millions of dollars of young people that grew up watching more channels discovery food HKG.
I'd that are that are consuming it on other devices and we're monetizing it and so there's a lot of win wins here, where we can take great content.
And figure out how to get a charter Comcast Cox 80, entail Charlie how do they figure out there. There's there's ways that we can work together to create more value.
But the key for US is we have to reach everybody. We have this incredible content that people love.
And.
Where weve assembled most of the great brands and Greg characters outside of scripted and movies and that's what people spend about 40% at that time on and they've been doing that for the last 50 years, They love that content and so.
We feel good about it.
The cable guys are going to wake up and find out what we're doing they're going to be inroads with us figuring out what we're doing that creates more value for both of us. They have lots of broadband only subs that there were only selling Netflix too and they don't like it and we don't like.
Okay. Okay, let me ask sooner because affects the Olympic color, but the question would be what if the Olympic still don't occur this year, what's the impact on the cost side and then all those revenue buckets, you've talked about how are those affected also.
Well.
We're monitoring it closely we are following the iOS easily and.
That's about all we can do at this point, we are continuing to prepare.
For the Olympics, and really were looking internally yet at all scenarios.
The extent possible, we have taken out some insurance here.
So you should once we took out a long time.
You should you should rest assure that it's not going to have a.
Any adverse impact on our financial.
Got it all you want to add any color from your just got no I think what you said is right where we continue to work very closely with the RC and follow their lead.
And.
Parent and we're ready to go and we're excited about going and it obviously it should things change will continue to keep you updated.
But we feel like.
It should be a positive for us and if it doesn't happen.
Owners that will come back you're not did you, but it won't be an adverse impact on our financials.
The topline number what would change because as I pointed out there there is a contribution but but so what the what the expense line.
Thank you.
Okay.
Thank you.
Next question comes from just a rife Ehrlich from Bank of America Securities. Your line is open.
Thank you I've a couple of direct to consumer questions can you give us some metrics our color.
And on what you've seen so far in food network kitchen in regard to revenue next sponsorship.
Commerce I, you, even seeing subscription revenue yet given a three month free trial.
Anything you can say on engagement, but also be helpful. And then just separately you as you consider all your direct to consumer options, but aggregate or go to silo Route would you consider selling your general entertainment content to other streaming platforms, whether its peacock or others.
Right now we're looking at.
We think that where the best global IP company.
And we were the only company that has it in every language with the depth that we haven't so.
Well right now our strategy is to keep it all for ourselves and if we do partner it would be partnering more or like what we did with prosieben or what we did with Paul sat which was finding is effective in the you know any ecosystem of what what do we think it looks really scalable and exciting.
I'm personally Super excited about this local language local sports and partnering with other local broadcasters across Europe, and Latin America. There is no. Other company that can do that there might be a bunch of companies that would like to do it but were in every country. We have we have significant library in every country. We have commercial teams in every single country.
And you could just you know that idea or and and and the way that people are reacting to it. It just you have Netflix out there and Disney plus coming to great great products, but they're always going to be 90, 10, 80, 20, and this idea of having local sports and local.
All content.
Feels quite good to us and we'll keep you up to date on that Peter you want to talk about.
Good morning, Jessica I'd food network kitchen, where we're very pleased so far you know were five months into this we're still on the early days, but I think the signals, we look for our signals like what's the customer rating at how strong the engagement how big of a funnel are we building and I think we're very pleased with those.
Early results on those so far if you take a look at our product ratings.
Yes, we're up to a four age.
But we've been a four nine the last two months so out of the gate Thats.
That's a really really.
Great feedback from our consumers that we've built something that they love and they're using quite a bit and when do you see a rating like that you end up seeing actually you want to get a rating like that if there's a lot of engagement. So we're very pleased with how much they're using the product.
When we launch this it was this combination of entertainment and utility and we think as Medivation and and so far that's exactly what's happened. The second Big thing is we're excited about the amount of interest we've had from partners at our partnership with Amazon as David County.
Discussed earlier in the call Amazon is very pleased so far I.
I would say.
We're very pleased with how much.
Engagement, they're getting with Alexa, but for them. This is one of the most innovative apps on the fire TV platform and beyond so stay tuned I think we have more to do with Amazon as beer goes on but we announced a few weeks ago. This partnership with Charlotte Todd and we're quite excited about and the idea that all these customers that are naturally attractive.
Cooking, who are visiting several atop store either to buy a product or be part of their membership group or take a cooking class are all going to get a six bought free trial that rolls to pay is as quite exciting for us. So we're excited to sell it turns out you asked about the revenue mix and it's still early so I would imagine this is going to evolve over.
Her time, but it's been about.
45% adds 45% subscription and maybe you know, 10% commerce and other partnership activities, but I'd say, it's still early in the game you know, we're we're again quite pleased with how much activity, we're getting a free layer.
But the people who are subscribers have become very very active users quite quickly. So we're optimistic and look forward to given you guys more details as year goes up.
Great. Thank you.
Thank you. Our next question comes from and find burn from Morgan Stanley. Your line is open.
Thanks, Good morning.
I wanted to ask either good or JB. Good during their prepared remarks, you mentioned, you're taking a more aggressive stance internationally.
Considering a faster pivot to TTC and talked about the impact an affiliate revenues over there could just give us a little more color on sort of on what's driving the relationship between that pivot and sort of slower revenue I would've thought more aggressive stance would lead to.
You know sort of higher affiliate fees or at least maybe a bigger opportunity in TTC just trying to understand the bridge there and then David there's been a lot of M&A in the Vod space or some M&A. Some speculated M&A in the press like Pluto's zoom, though to be.
Just wondering what your view is on the divide market and whether there's inorganic opportunities or if you're passing up on these sort of why you think Peter less interesting then building the business organically.
Thanks, guys.
Great. Thanks, Ben on the on your first question I think it's a timing issue, but the reality is we do see in the part of the reason why are we making some of these more aggressive pivots to direct to consumer number one is we're seeing.
As you look at closing 19, some of the fastest growth rates of our direct to consumer, particularly the play.
Scriber growth that we've ever seen and even kicking into this year, we had our highest net ads in January that we've ever had.
And so we're seeing that growth curve.
Celebrate and so when we see that opportunity a product as Peter mentioned forever, and K getting better and better we want to lean end and therefore the timing is.
Really one where we may take some of the distribution of traditional distribution money off the table to lean into the LTAC space. So what it creates this to your question about the affiliate or distribution revenue line item. It's just a timing difference where you'll see some of the hit short term.
But the benefit and the growth come in over the medium obviously to longer term and so that's the that's the reason why you may see a bit more lumpiness in the in the near term as we accelerate into that growth.
Again, we saw accelerate 19 into the first few months at 20 within continue to accelerate.
I got it. Thank you that's helpful.
On the a bought I think it's pretty fluid in terms of Eva Mendes fraud, and the way that that the world used to think about this was everything had to be subscription, but for instance in the cycling in and golf space being able to aggregate millions and millions of people that loved to have an affinity.
For free.
For for golf for for cycling.
And have that an aggregate that globally is quite attractive to appetizers and you also have the ability to do come to do.
Shopping type.
Applications. So that you you can you can view golf is having a subscription level, but also like a virtual global broadcast network for people that loved golf they might not be there might have to pay to watch Thursday through Sunday, but they can come in they can they can read about the golf course.
Worse, they can see short form from Tiger, they can see or get a little bit of instruction. They could figure out where to go on a golf vacation and more and more we're seeing that advertisers are saying to us we want to get access to those people same on cycling same with Boone, we've built a very big funnel.
And are pulling from people that want recipes and so that balance of.
How much do you put a behind the pay wall and how much do you put below is something that we're trying to figure out but this idea of getting affinity groups globally, we think a vod aggregating a global a global virtual broadcast network of people that want recipes and love.
Food.
That could be quite monetizable and so we think that's a.
And remember one of the big advantages for US as were owners and so we're really we don't we really don't want to get into the business of a buying a product and then going out and trying to rent for very high cost and then 23 years later, you got to pay up to keep it. So we really like our model and we think game bought actually is.
Compelling and overtime will will take you through these big funnels of Avon and how we're monetizing them from advertisers or or for transaction and then.
The subscription side, which we still think it's going to be very compelling piece and is a piece that we're driving around the world and the only other thing I'd add Ben it's the to what David said is you know as we found in the linear world the last three decades.
Having these brands and these super fan groups, where you own the category from a pricing in that advertising perspective is hugely valuable and so what we're seeing what Peter is building whether it be around cycling, whether it be around who whether being about Magnolia. We don't have to actually have an algorithm to define the customer base and the user base.
We only category and so the endemic value of that is way more powerful from a pricing perspective than the algorithmic value. So I think thats something that also we think is going to be a big big tailwind as we get further into the biggest challenge over the next decade with people consuming more content than ever and everything being available is curious.
What do I watch basic cable.
Okay. Russian it was that everyone everybody watched six to eight channels, but every one of the family had a different six to eight in the in the wild West World of every all the IP is out there even if you subscribe to a lot of these surfaces. The big challenge is gonna be when you get there do you have anxiety to confuse the you know how to navigate it what's there that I love.
I think one of the big advantage is that we're finding in the testing that we're doing is what people land on our products Avon ratified the reaction is oh.
This is there the brands, but I love I know I know exactly where to go there. There are the characters that I love I want to spend more time with them and I think that is going to be over the long term a huge value to us versus going out in telling everybody to watch a show.
Thank you both that's helpful.
Thank you. Our next question comes from Alexia Quadrani from JP Morgan Your line is open.
Thank you so much just started to follow up questions on your comments on streaming I first on the incremental investment spending in this here how much is sort of put to content versus sort of technology and then my other one is just if you can maybe talk broadly about how big you think the addressable market is for keeping your other aside service.
Let me, let me start with the.
From an investment.
It's essentially.
Very similar structure to what we have done in 29 team as well so content is by far the largest.
Line item here.
You can assume roughly half of half of the spend and then as I said earlier, we are ramping up beat US team a further and that's that's going to have a significant impact in 2020, Peter has been very successful in bringing bringing in a lot of a lot of great people with with Greg credentials and that's helping us.
Pull in more junior people below so that's that's on a great track, but obviously is going to be reflected in and personnel expenses, but as I said earlier I expect that too.
I told to a certain extended and.
Got some operating leverage as we as we grow the businesses. Further so those are those are two of the he component than the third one and again this is.
But in flux as you would expect is performance marketing and that's the hardest the hardest to predict and as I've said many times, we will absolutely keep the flexibility to get behind something that that we see working very well and potentially to cut back on on spend in other areas. If if we don't see the return opportunity.
Yeah, I hope that helps.
On the on the Alexia on the question of the addressable universe for deep play look we think we're in the first thing here you know, even though we're seeing great scale. The reality is if you just look at our European footprint, we address almost 700 million.
People across the European footprint.
We are aggressively going after obviously, northern Europe, which is a smaller subset, but a wealthy and a high paying subset very attractive demographic in the nordics.
We're going after Germany with join almost 80 million people.
There were going after Poland, our biggest current market in international.
And also a sizable market, but we also have presence is now in Italy.
In the UK in Spain, and so.
We're in early days, but we think the addressable market in in Europe for the leading local content player in those market is significant.
And then I'll just add a quick comment on the technology investments, we're making one of the reasons, we feel like the the peak will be this year in 2020 is that we're building the central technology platform for all of our direct to consumer products. So it'll be one platform globally. There's a lot of advantages for us and doing that obviously, the one of them insufficient.
He will have to keep building the same products over and over again across the world, but probably the bigger advantage. We like is that we can actually pivot faster and respond to customer feedback and bill products that people love. So if you guys take a look at the product ratings for de play for motor trend for food network kitchen for all of our goal.
Apps, they have made significant improvements over the last fall.
And we're very excited about does because if we're going to win in direct to consumer it's going to be this great combination of the great content that we have along with a great customer experience that we can build and we think we're in a unique position to be able to do both of those together.
Thank you.
Thank you Sir our next question comes from John Hodulik from U.P.S. Your line is open.
Great. Thank you.
David You mentioned the worsening ratings trends in the U.S. year to date can you talk about any initiatives.
You've got to turn those trends as we look out.
Into 2020, and then number two the buyback authorization I think was welcome anything you could tell us about the the timing or the cadence of those repurchases would be great. Thanks.
Sure.
Well I think we have a we have a great portfolio quality channels and they go up and down I think you know for US we're laser focused it's what we do for a living.
TLC right now is the number one channel in America for women by a lot.
And it's the youngest.
Of of all the channels and let the view it was gone up dramatically and TLC was like the number 18 channel in America and a lot of our new content wasn't working three years ago. So we we focused on who is the audience. What are we doing right. How do we do more of it we've been doing the same thing that discovery last year, we really enhance.
Neustar Blue chip content, which has significantly elevated the brand we went out and bought almost all of the quality IP together with the best producers to shore up the quality brand, which we think is is a in terms of sustainable growth is very critical and we've been working on series and Nancy Daniels and the team.
Same you could see it were really discovery is is really improving and we're moving where you know every quarter.
I'd we're looking.
I'd was growing and growing for the last nine years for the last nine months, that's been declining and so you're going to see a significant refresh a henry slice and Kathleen had been working hard on it will be launching that relatively soon and so.
For Us I think there's what we do for a living the car we drive we get in when we hear a noise. We know what's wrong with it we you can't always cycle offensive as quick as you'd like but were quicker with our channels because we don't have scripted.
And so I think that that you'll see some improvement on that.
And you'll see that are you know, you'll see us a quarter to quarter, you won't be all channels, but we feel quite good about that.
The bigger the bigger challenge that we have right now that we're getting much more excited about as well how we aggregate that IP I think we're off to something in Europe, and we're where we will look into landed here in the U.S. with the right mix.
On the buybacks John.
<unk> points.
Clearly, we are generating a ton of cash and.
Again, we have our capital allocation priorities, but we're returning the cash that we that we don't use for our business.
Second point is again I view this 2 billion authorization as a as a clear so to sign of commitment.
On the board to the team to the strategy here and as as with Oh last authorization I'm not going to put any specific timestamp or cadence an accident, we value the flexibility now that being said.
As as you heard earlier, we have essentially gone through the entire 1 billion authorization.
By buying back another 50 million.
Dollars, what the stuck in the first quarter and if you look at the current share price levels, you shouldn't be surprised to see us very actively in the market right now.
I should not right now.
From.
And the next couple of whats right. Thank you.
Thank you Sir our next question comes from Doug Mitchelson from Credit Suisse. Your line is open.
Oh, thanks, so much one for David one for Peter David.
What kind of timeframe would you put around your discussions and your thoughts around a U.S. direct to consumer service that might include all the channels and I think one of the things investors are struggling with is the ultimate business model behind that you're talking about some lumpiness in Europe would doing something with flux on Comcast for example, be you know you said.
Based revenue stream would it be a purely advertising sort of revenue share or or do you look at this is a way of we can replicate the existing traditional economics.
Yes were direct to consumer world in partnership with distributors that would be helpful. Then Peter for you.
I'm just curious what you see as you execution hurdles or milestones you know looking forward. It feels like you've got a lot of momentum.
Across all the streaming businesses.
Is it a glide path from here and it's purely a marking an exercise what would you say or the challenges.
And opportunities as you look forward. Thanks.
Sure Yeah, Doug the.
I think the way the I've been thinking about it is at the very first step we try to take was to build this foundation. So then at some point. It is a glide path about a glide path right now I can assure you, but the first two steps. We took we're building a really strong team and then building. This technology platform. Another team side, Yes, I think we've talked about this before I heard obviously.
Sina is our CTO from Amazon, we hired tightly Whitworth as our leader for food network kitchen, and these lifestyle products and then we're going to what else later on this morning, I'm happy to say, we've hired Lisa home to be our leader for content strategy and she comes to us from food where she spent.
Over the last five years working on content and the odd. So we're very excited about the talented team. We're building in the Technology Foundation. We have this great content and now I think the journey. We're on his three things number one how do we built products that consumers really love number two how do we.
Bill partnerships.
With others, who can help us scale. These products much faster and then three how do we how do we continue to iterative respond to customer feedback you know the lesson I think I learned over my time at Amazon is there's very few things that are silver bullet and come out of the gate in are already instantly successful. This is a journey and these consumer products.
You know we're on a journey for the next 100 years to build these products and get them to be better and better and better overtime, but I do think.
Getting most of our products over the technology platform and 2020, and 2021 is going to make the incremental investments, we need to make and technology smaller over time and more and more of our attention will be focused on the content in the marketing.
We go.
Yes on the on on aggregating our content.
Yeah.
The appeal of our content to people on other platforms.
We've seen a lot of prove out in art in go and one of the things that I wanted to point out is we are driving people to go because we make twice the CPM on that platform as we do on the traditional platform and let the view as higher at the age is younger and so one of the things when you look at our ratings is you don't see.
That all day long were telling people on food and age GE and I'd and discovery to go to go and on old and every time somebody goes to go.
No it's concerning for us and they're spending more time with us there on the devices and we're getting double the money and so for US number one when you look at our ratings. Unlike anybody else, we're literally pushing people off platform because from a modest and it's one of the reasons you can see like you did like you did last quarter in the quarter before that hey it.
It's like your ratings were down how did you do so well because we're pushing people to a better monetization platform we.
We are talking to distributors and.
So we'll come out when we're ready we want to come out with something that works for them works for us, but there's no question that we think because of the monetization on the advertising side that that we can replicate the economics, 100% that we number one number two is that you know the value of what we're offering.
When you look at our aggregate package and all the IP that we have and someone's paying $110 for cable $80 for cable and they grew up watching all of our stuff.
And now they can if we decide to aggregate that they would have a chance to see all the stuff. They love for a lot less so we think on both ends of the ledger and the answer may be that we do both in a way that that's quite clever with the working with the distributors and then any ecosystem for people that are paying.
You know, which is what we're doing now with go and having some aggregation there which would drive viewership.
And increase the value of the overall experience for consumers and then have people that are not on the plot that that arent subscribing to cable or satellite have an opportunity for very you know for not too much money.
To be able to get the best of what's on and cable with a bit with a bigger library the Netflix.
And there maybe some people that want to do a lot of people that want to do both they want the optionality. So that's what we're trying to figure out we're talking to the distributors and we think we have up because we own everything we can move very quickly because we have the platform already in place. We can move very quickly and I think you'll hear from US you know in the near term.
I want to add 1.2, what Peter sat on the on the milestones point, it's another case off.
US doing what we same thing what we're doing you heard us.
Actually Peter talked a lot about how we're focusing on the input factors first and we're building a product how we're getting after ratings up power, our driving engagement et cetera, and again, we're very happy with what we're seeing and you should should view. The fact that we're talking about next generation revenues now as our commitment to start turning that into into financial performances.
Well.
I'm looking forward to that long term target. Thanks.
Thank you Sir our next question comes from David Miller from Imperial Capital. Your line is open Yeah, Hey, guys, great numbers I'm going or a question for you about free cash flow other than the outflows with regard to the Olympics, assuming the Olympics happens any other puts and takes on the working capital side.
That you can talk to us about as would just sort of model out what free cash flow might look like in 2021st 2019, 2019 free cash flow stops the outstanding I've got you guys sort of slightly down.
Mostly just due to the working capital and plus I haven't place right now, but I just wanted to kind of refined that if you're willing to what kind of expound on that thought thanks.
Oh, great. Thank you. So yeah, I mean again I am I don't want to give.
Specific guidance here, but again, if you keep in mind.
That we have already funded 300 million.
Consumer investments here and in 2019, the underlying core run rate was actually at 3.4 billion and.
This is going to continue to be acute priority for us.
My estimate is that we have generated north of 800 million and synergies since closing the deal and there is more that we're working on that's why I made the comment earlier, you should assume that in the core business outside of our investment areas. We will continue to be you know relentlessly driving for cash and efficiency.
Now that being said I do think that.
2019 was an outstanding year, and you're absolutely right the investments on the Olympic side.
Yes.
I think that's going to bring down.
Free cash flow to some extent, but we'll continue to to push hard and and as you've got him I'm glad that we were able to.
To to turnaround that negative trend on working capital that we have been suffering from her for awhile.
Thank you.
Okay. Thanks, very much I think I think we'll wrap it up there. Thank you very much in West Beach next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
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