Q2 2019 Earnings Call
At this time all participants are in listen only mode. Later, there will be a question answer session and instructions will follow at that time.
If you require any assistance during todays call. Please press Star then Jerry touched on telephone.
As a reminder, this comes Palestinian recording.
I would now like turn the conference over to Andrew Slaven Executive Vice President of Global Investor strategy, Sir you may begin.
Joining me today are David Zaslav, our President and Chief Executive Officer, Gunnar Wiedenfels, our Chief Financial Officer, and Jay <unk>, President and CEO Discovery networks International.
You should have received our earnings release, but if not feel free to access it on our website at corporate Dot discovery Dot com.
On today's call, we will begin with some opening comments from David and going up and then we will open the call for David Garner in J B to take questions.
Before we start I would like to remind you that comments today regarding the company's future business plans prospects and financial performance are forward looking statements that we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 995.
These statements are made based on management's current knowledge and assumptions about future events and they involve risks and uncertainties that could cause actual results to differ materially from our expectations.
In providing projections and other forward looking statements the company disclaims any intent or obligation to update them.
For additional information on important factors that could affect these expectations. Please see our annual report for the year ended December 31st 2018, and our subsequent filings made with the U.S. Securities and Exchange Commission.
And with that I will turn the call over to David.
Good morning, and welcome everyone to our Q2 earnings conference call.
Discovery had a strong quarter with healthy operating and financial results.
With the benefits of the scripts acquisition flowing through all areas of our global business.
While making significant strides across a number of our strategic initiatives around the world.
We are on solid financial footing.
And remain extremely well positioned.
To continue our pivot towards the screaming and direct to consumer marketplace.
Where we see exciting opportunities to aggregate and super serve global fan communities.
For the quarter.
We met or exceeded all of our core guidance metrics.
With accelerating revenue growth, both domestically and internationally.
This quarter our numbers are.
655 and three.
We achieved 6% domestic advertising growth.
5% domestic affiliate fee growth.
5% international advertising growth.
And 3% international affiliate fee growth.
It's one great set of numbers.
The company is operating on all cylinders.
And I'm very proud of the team and this quarter's performance.
And we anticipate another quarter of healthy growth in Q3, which Qunar will take you through in detail.
We've got a nice tailwind at our back and I believe we are performing at the top end of the television advertising business domestically.
And perhaps even globally.
The television industry is far from dead.
Here or abroad.
Contrary to what many believe we're getting real meaningful growth from the core TV business around the world.
And it feels.
Sustainable.
And our position with the industry has never been stronger.
And I believe.
Poised to grow like no other.
HGTV food.
TLC I'd and own.
The top networks in America for women.
These networks have made us the number one media company for women.
25 to 54 across all of television.
The number one media company in America for women.
Broadcast and cable.
Well the 16% share.
A huge accomplishment.
And meaningful Testament to our creative storytellers.
Our strategy and our network leadership.
This past Sunday night.
Nearly 35% of the female audience.
Was watching one of our networks.
To be clear, there's a lot of great scripted content from any number of great media companies.
Really amazing stuff.
From Disney Warner NBC.
CBS Amazon.
But its across an incredibly crowded.
Expensive and competitive landscape.
But there was only one company.
Playing at all level and the other 50% of the content pie.
And that's discovery and.
We had the highest quality and recognizable brands that audiences love.
And tune into more than any other media company.
Including networks that have the highest lens to view and engagement.
On television.
And it's been a hugely successful calling card for us with advertisers.
Reinforced by the prominence and resonance of our brands.
The value of our brand safe and mobile first go apps.
And traction for new sales products like discovery premiere.
Which was sold in the upfront for the first time.
And has had some super traction within the industry.
On go we're seeing great traction across all of our ops.
Setting records in total daily streams, much of which doesn't get picked up fully by Nielsen.
For shark week alone, we've seen over 1 million streams each day.
The performance of this best in class platform.
Serves as a great example of how well our content travels within a mobile first ecosystem.
As well as to younger demos.
Internationally, our operating momentum feel stronger than it has been in quite some time.
Driven by growth in our global audience share.
Across all key regions.
Continued pay TV subscriber growth.
Positive reception to the continued integration of scripts content.
Well at the same time promising launches of food and H.G. branded lifestyle networks, particularly in Latin America and Europe .
I'm pleased to note that our linear share of market across our top 10 International countries was on average up a healthy 5% in the quarter.
With growth in six of the top 10 markets.
Two of which were up double digits.
And our audience delivery was up an average of 4% across the top 10.
These are terrific results and they're really helping to sustain our overall international momentum.
This tailwind at a time when there are still real pockets of macro headwinds.
Positions us well, if and when certain markets and economies stabilize.
Strategically discovery is made a differentiated bet with a different portfolio of IP and assets.
We own virtually all of our IP across all territories and platforms.
And John or is that have great utility and functionality.
We have many of the most beloved an iconic brands on the planet.
In People's passion areas.
Home food travel cars crime natural history science.
Oprah.
And live sporting events like the Olympic games, the PPA tore Grand Slam tennis and cycling.
We produced over 8000, new hours of original real life programming, a year with unrivaled scale and Alejandro.
A powerful content engine at a time when the value of IP in our industry has never been more strategically important.
Globally, we have nearly 500 free to air in pay TV channels with roughly 10 to 12 in every key markets around the globe.
The combination of our strong and trusted brands and huge reach.
For marketing and top of funnel promotion, we believe gives us a real head start when it comes to building a direct to consumer portfolio around immersive experiences.
Our strategy and approach has been focused on doing that across three broad consumer categories.
Sports.
Lifestyle and factual.
First in sports we have three main products.
The eurosport player across all of Europe .
Golf TV, a fully global platform.
And global cycling network.
Within lifestyle, we are working on three different subscription based offerings, all with different product cycles.
First motor trend.
Focused on car lovers.
Second our new multi platform Magnolia joint venture with chip and Joanna gains that we are building with plans to launch in 2020.
And things are going terrifically well.
And we also continue to actively look at the food and cooking space.
And look forward to talking to you more about our plans in that category over the coming months.
And within factual our soon to launch service, which brings together the very best of discovery and BBC real life content will offer a comprehensive view and do experience one that is immersive and interactive.
Across this important vertical.
This important family friendly vertical around the globe.
Additionally, there are three important products in Europe that speak to the breadth and depth of our direct to consumer strategies globally.
One the TVN player in Poland, which is the number one SBO deep product in all of Poland.
Deep play in the Nordics, our who like a Vod S Vod offerings.
Which has enjoyed robust growth over the last year.
And three joined in Germany, our venture with Prosieben, which has gotten off the ground in may to a very solid start.
Overall, our ambitions are to create strong multi platform ecosystems.
Driving opportunities for multiple revenue streams.
From advertising.
Subscription revenue.
Sponsorships.
As well as e-commerce retail as well as instruction.
Across a growing suite direct to consumer platforms and regions.
Underpinning. These efforts is our evolving technology stack, which under the direction of Peter Ferrous Si and his team.
Is being repositioned to drive a better consumer experience range of efficiencies and functionality that will allow us to dramatically reduce the resources and time to market for existing and new products.
As many of you will remember we got Peter from Amazon, where we spent over a decade building Amazon marketplace.
We remain excited about both where our businesses today and where we are headed.
We are maximizing our position within the core linear ecosystem.
Generating stable revenue and free cash flow growth.
Well at the same time.
Appropriately and judiciously investing to position ourselves for future growth.
At a time of rapid and structural change for our industry.
We recognize there are risks, but also great opportunities.
And we believe we are as well positioned as any global player.
To capture viewers as they migrate to alternative platforms.
And while we are still in the very early stages of launching our global direct to consumer verticals.
We believe they will provide us with solid long term runway.
With that we are assertively leaning in where we see opportunities to leverage our breadth depth and functionality of IP.
Such as in food and home, where we believe that there are many unique ways to reshape our vertical knowhow.
Into a more direct and distinctive relationship with our passionate fans around the world.
With that thank you very much and I'd like to turn the call over to garner to take you through our financials.
Thank you David and thank you everyone for joining us today.
I am extremely pleased with our very strong second quarter operational and financial performance, which demonstrated an acceleration across every one of our four core revenue metrics.
As well as the progress were making strategically as we continue to turn to transform and pivot discovery.
We are performing at a high level and still at the very early stages of leaning in to the many unique and differentiated growth opportunities, we see in front of us.
And as such we are delivering top of industry performance enjoying the benefits of our scale and presence in the U.S. complemented by our breadth of global distribution, which is uniquely supporting our efforts to build direct to consumer and stream products that power peoples passions.
I'd like to share some financial highlights from our second quarter as always my comments will be in constant currency terms for our international business and for the total company unless otherwise stated.
And foreign exchange did have a material impact on some of our metrics. This quarter. Please refer to our earnings release filed earlier. This morning for a more comprehensive view of all the drivers of our second quarter financial results.
In the second quarter discovery again achieved very strong operating performance with 6% use advertising growth, 5% us affiliate growth.
5% International AD growth, which included a one month impact from the consolidation of the three networks acquired from UK, TV, which added roughly one percentage point of growth.
And 3% International affiliate growth.
We also grew total company adjusted OIBDA, 7% a function of our strong revenue growth and the benefit of an 8% decline in U.S. expenses modestly offset by an 8% increase in international costs, which we have previously noted would begin to increase as we invest in our growth businesses.
Additionally, we reported $596 million or free cash flow in the second quarter of 2019, bringing our trailing 12 months free cash flow to $2.9 billion still accounting for roughly $200 million of cash restructuring costs. This allowed us to end the quarter with a net leverage ratio of 3.3 times.
Now, let me share some forward looking commentary starting with the four key revenue drivers for the third quarter 2019.
First for US advertising growth is expected to be in the 3% to 5% range driven by similar dynamics and pricing monetization and ratings as usual remember, though we are facing a slightly more difficult comp against last year's 5% growth in third quarter.
Also please keep in mind there are some high profile events. This quarter on the discovery channel like Serengeti, which premiered the Sunday night that will be a key factor in our ratings driven contribution this quarter. If you live in New York City, you've no doubt seen a bus or Billboard promotion, we're all very excited about the series.
Second U.S. affiliate from today's perspective is likely to grow 5% again in the third quarter.
This assumes no major change in subscriber trends beyond what we have seen up until now and while there are indeed, a number of both headwinds and Tailwinds. We can reaffirm our full year guidance of U.S. affiliate revenue growth in the mid single digit range, particularly given our best in industry representation across the virtual distribution platforms.
Third we expect international advertising growth to nicely accelerate driven by share growth and our top markets and contributions from our digital investments. We also expect a full quarter of contribution from the UK TV lifestyle business, which should add an additional two to three percentage points of growth.
Thus international advertising is expected to grow at least high single digits in Q3.
And finally international affiliate growth is expected to be up mid single digits. As we've seen continued improvement in the underlying subscriber trends across a number of markets aided by continued monetization of our digital streaming products and investments and new channel launches in a number of markets.
Turning to total company guidance, we continue to expect another year of healthy free cash flow growth in 2019, even after making the necessary investments to build out our direct to consumer portfolio and the previously noted step up in capex from such items as global real estate consolidation and transformation projects related to technology infrastructure and software development.
The cadence and magnitude of our investment profile will be determined by the ultimate opportunity set across new and existing initiatives and the level of success based spending we will need to support these initiatives.
Accordingly, our view on the puts and takes behind or ultimate full year free cash flow has not changed versus what we laid out last quarter as such growth will be based on adjusted OIBDA growth and lower cash restructuring charges, partially offset by increased investments in direct to consumer higher capex and higher cash taxes.
We continue to expect a negative impact of our DTC investments on full year 2019, adjusted OIBDA totaling roughly $300 million to $400 million, depending on the timing of the rollout of these investments.
And though we again enjoyed another quarter of total company margin improvement, which in Q2 was 100 basis points. As we've previously noted the expected ramp in our digital investment spending will flow through more heavily in the second half of the year.
And with respect to the step up Peter and his team are creating a more robust global technology platform to better serve all of our global direct to consumer and streaming businesses. We will discuss this an incremental detail later in the year. As we proceed further however in terms of scale and scope or digital products currently operate on over a dozen different owned and operated platforms and depend upon a dozen third party platform.
Streamlining this will materially boost the functionality and consumer experience as well as the efficiency and speed to market deeply or broad general entertainment a button as bought App that is very popular in the Nordics is a great example of how much improvement this new technology can produce.
The plate was among the first existing services to migrate to our new platform and we've delivered a marked improvement in consumer experience and reduce churn.
Resulting in strong subscriber growth up nearly 150% year over year in the second quarter.
Importantly, I believe it is worth calling out once again the acceleration in revenue growth that we're seeing particularly across our international segment is in large part a function of both stable core linear business as well as early traction we're seeing from our direct to consumer and streaming initiatives.
Moving on to taxes.
As we have previewed there was a onetime noncash $455 million or tax benefit in the second quarter, which made our second quarter book tax rate negative 38% with that we now expect our 2019 full year book tax rate to be in the mid single digit range.
Remember this was a noncash benefit and there is no impact to our cash taxes or to our free cash flow.
Regarding capital allocation, our priorities have not changed there are still two number one optimize leverage and within our three to three and a half times net leverage range. We currently plan to continue to prudently de lever towards the lower end of this range over time.
Number two concurrently we will continue to evaluate value enhancing investments along with strategic M&A and number three finally, we will opportunistically return excess capital to shareholders.
Before I close let me quantify the expected impact that foreign exchange will have on our 2019 results given the movement of the dollar at current spot rates FX is now expected to negatively impact revenues by roughly $185 million to $195 million and EBITDA by $80 million to $90 million versus our 2018 reported results.
In closing I am very pleased with both the operating performance of the company or financial footing and outlook as we continue to generate healthy free cash flow for a stable core business and embrace or global pivot towards direct to consumer media. Thank you again for your time. This morning, and now David JV and I will be happy to answer any questions that you may have.
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Our first question comes from just a brief Ehrlich with Bank of America Merrill Lynch. Your line is open.
Thanks, two questions first for David.
Can you go back to the U.S. advertising market I mean, it's incredibly robust and besides price you seem to have some other levers to benefit from from the market.
You talked about monetizing digital content, maybe a little but the inventory could you give us some color on.
On where you are what you can pull and what is what are the drivers of demand.
I mean, it's it seems like there's a lot of growth and will be even more growth in non advertising platform for Disney plus is this driving advertisers back into more traditional media and then I guess for Qunar or JV.
Some of the spending we saw international expenses go up a lot, which you've talked about can you talk a little bit more about.
The benefit that you will derive overtime the tech platforms and anything else you want to.
Thanks Jessica.
Well look the the upfront was very strong.
And leading up to it scatter was strong.
And it was accelerating and I think a piece of it is that.
And I spent a lot of time talking to the agencies as we try and kind of lift ourselves up to where we see broadcast in the high fiftys in low Sixtys and we are still getting cpms that are much lower.
That the ability to really sell product.
Appetizers defining that television is still one of the most is the most effective platform to do that and so I think there is a move that in addition to that there is a feeling of safety. What are you next to what are you buying who has the talent that you're buying with the environment that you buy you can do that on television and digital there is a fear of that in the overall narrative for a lot of these digital companies has changed.
And so I think that sets and overall environment that is more positive but for US. This is a big moment for our company.
I said I've said for a while that we have the top four channels in America for women and no one's ever done that before I'd TLC.
Food and AG and the number one channel for African American women with own.
And we've worked hard to do that.
But when you put it all together.
We are now the number one TV company in America in terms of the women we reached the time they spend with us.
Its discovery and its as a guy that started out in the cable business and look to broadcast when I was in New Jersey looking over the river. This is really a big moment bigger than really great broadcast companies with a centerpiece of their companies are our APC and NBC and CBS and so the reach that we have with women.
And to be able to go into upfront with that reach with us with with safe brands with brands that people wake up and want to watch before they go to sleep they want to watch it and the other thing that we have that if that were true we're not proud of but we're trying to really drive is.
Even though with the number one place to reach women the most effective demo.
Our CPM is less than half.
The broadcasters going into the upfront and so.
We've we've really worked hard.
On developing some new products, we have discovery premier, which is a unique product, which is much higher than our traditional CPM, but why would you spend money on a broadcaster and get a 0.8 when you can come to us and get to six rating on a given night or five rating were seven rating.
And so we made some progress with that we're also the only media company I believe that has a really effective.
Authenticated apps and the reason for that is people won't go to in general These general interest services.
And download them to spend time with them. They go to those channels for series.
And they go to the broadcasters for series and so the idea that we're doing over 1 million streams on discovery and millions of streams, where people are getting up and spending time with with food and AG and I'd and the average age is in the Twentys and the length and the length of time is quite high. So overall, we have great safe brands.
We have we have the largest share of women.
And the advertisers also recognize and this is something I've been saying for a long time is we expect that our share is going to continue to grow.
The broadcast this sustainably declining.
In a double digit fashion and a lot of those broader services that have re runs and that are competing with the with the scripted series in scripted movie businesses.
More and more the only place to CLO quality content that you could see live is us and so.
We had a great great upfront.
We're going to I think you're going to see some meaningful growth flowing through for the next year.
And we feel really we feel really good about it and at this moment scatter remains strong.
And.
For the moment.
TV is back and I think with the with the lead horse in that game and and.
We're not taking for granted where the where the world is.
Thats one of the reasons why we're investing so much in IP with a leader in IP globally, and we're deploying that said IP around the world and you'll see that.
And you'll see us invest in that for the more sustainable long term growth.
Yes, good morning, Jessica so.
Listen I could not be happier with the financial profile that you're seeing in this quarter were making a lot of progress and we're doing exactly what we said we were going to do.
We continue to benefit from cost synergies. It was another quarter of margin increase even though I had already spoken about sort of that.
Coming to an end at some point and I had guided to $300 million to $400 million of negative impact from or startup investments in in the digital space and we're seeing some of that kicking in.
Peter Ferris he is coming up on his first year a lot of the initiatives are picking up speed and to your question on the international expenses. That's what's reflected in that expense number Gulf TV is it has started its global rollout.
Theres, obviously, IP amortization coming through a digital in general if the play we're pushing you also had.
You also had the consolidation of UK TV kicking in for one month, that's added on a like for like basis.
Little bit of expenses, but bottom line is we're making these investments as initiatives start to accelerate.
And you're already seeing some impact on the revenue side as well.
The the very strong numbers in the second quarter, 5%, an AD sales growth 3%.
On the affiliate side and and as you just heard we are guiding to an acceleration for both metrics.
Obviously to some extent is driven by the first contributions from those digital investments. So it's really.
It's really.
Working very well for US one last comment I want to make on segment segment expenses going forward.
It's more it's more insightful to look at the total company cost base because as we went through our transformation, we have shifted around a little bit in the cost base. So a lot of the expenses that JV is now carrying on the DNA segment are going to be leveraged as we rollout those products on a global basis for 2019, the investments are somewhat the eni heavy and that's going to that's going to even out as we move forward.
So again cannot cannot be happier with where we are.
Thank you.
Our next question comes from Alexia Quadrani with JP Morgan Your line is open.
Oh. Thank you so much I guess first off David maybe a bigger picture question, you've done such a fantastic job with the scripts acquisition I continue to see the benefits clearly in this quarter and the outlook I guess I'd love to hear your thoughts on the scale you know the need for scale longer term do you have the portfolio to compete with some of these larger players you know some of which you referenced in your opening comments or do you feel that would make sense to continue to kind of look for acquisitions or potentially a merger with someone else to be more competitive.
Just your I'd love to your updated thoughts on the current environment and discoveries positioning and then secondly, just a bit more specific you know TLC has been really strong ratings, a little softer discovery I guess any more color you can give there are you looking at serengeti as sort of a delta maybe change the ratings trends in that channel and any other programming on discovery, maybe discovery channel, we should look forward to.
Thanks Alexia.
The script transaction has really exceeded.
Our expectations on all levels.
And you see that in our free cash flow you see that in the fact that together.
The air quality together with our quality on the leadership side on the content side.
That's what makes us the number one.
TV company in America for women and positions us to continue to.
To grow in a meaningful way when I think of scale I guess I think of it I think of it two ways. One we're the largest player in it in the international space, where they would probably the only one JV will give you a little bit more color, making over $1 billion.
But we certainly wouldnt.
As the Disney and Comcast the deals with with Rupert show that the need to view the world.
As more than just the you SMB global we have infrastructure in every country. We have content in every country, we have credibility in brands and IP in every country and so scale I think we have a leader.
Ah outside the U.S. and we're also the leader in sport, So Ah and the quantity of sport that we have and et cetera. So on this on a scale side in terms of international and sport. We are we are the bigger guy and there is a lot of players that are going to want to try and catch up to us in terms of the genres. We've chosen.
You know we feel great about it.
Right now this is everybody going after the scripted in movies, it's it's creating an environment that is creating more and more opportunity for us I've said this before that I think where our share is going to accelerate but there's so many choices for scripted series and scripted movies and you now have four or five offerings between $6 and $15 and then you have the broadcasters and the Big Entertainment services and so.
To play in that space, they're going to have to get bigger and bigger in each of them has already kind of indicated they don't have enough IP they need more stuff they need more more more and therefore, they are talking to us about giving them more.
But we're not doing any of that right now we like owning all of our IP. We like the fact that we have great female friendly content male content and in our genres.
In the area of food, we are the dominant player in the world in the area of home, we have a dominant player in the world in the area of natural history together with the fact that we bought the entire BBC library globally for more than the next decade.
We have the majority of science and natural history, we have the dominant player in in the world in crime. We are the leader. So it depends on how you define things we're number one for women and we're the leader in each of these quality categories that we have chosen.
And then Weve picked new categories, which is character driven care.
Categories, which is oprah and and chip and Joanna gain so I think.
We feel pretty good about where we are we think we're going to continue to grow and as the ecosystem.
Continues to have challenges I think that challenge is going to be why do I want to watch where do I get the next scripted series, how many of them do I have stacked up.
This 50% of what people watches that stuff the other 50% is us and that.
That's why I think our share is going to continue to grow and that's why I think from our perspective, what we're trying to do to scale up is buy more stuff, but get more IP from the BBC get more get get that do golf Digest and lock in Tiger Woods globally with us, it's it's about getting reinforcing and our general and no. One else is playing in our space. So we think we're in a very good position on.
TLC Howard leaves, having a great run.
Two years ago. This we were dealing with the TLC that was down for a period of 24 months and Nancy Daniels and Howard Liang I dug in.
This is what we do for a living we are we've improved our leadership team now even more.
With Kathleen Finch and a lot of the great people from.
From scripts. So these channels are going to go up and down.
We got a great team now with discovery that where we have a lot of confidence in and Serengeti. If you haven't seen it is I think the best thing that we have seen and some of the best natural history content.
Globally.
That that we pushed out we put it on discovery, we actually took the last two minutes before.
Seven Gary started on Sunday, and we did a two minute promo across every one of our channels. So fuel watching food H.G. I'd and weak that's something we could do that no one does at eight o'clock.
Ill turn now to Serengeti on discovery and it did very well, we're going to get more of the L. Three but it did very well and discovery is back in its core natural history and with all of our BBC IP planet Earth frozen planet walking with dinosaurs woolly mammoths.
We are really compelling and formidable.
Thank you very much.
Thank you. Our next question comes from drew Borst with Goldman Sachs. Your line is open.
Great. Thanks for taking the question.
And thank you for the additional detail on some of your streaming initiatives.
I wanted to dig in on on one of them, if I could which is.
The PG a streaming service because I believe you are in the first year of your 12 year arrangement I think you went live.
And potentially up to eight markets. So I wonder if you could just share some of the early learnings.
In this first year and how that that deal is progressing.
Sure.
It's going very well.
I'm going to be seeing Jay Monahan Tomorrow morning overhead at Liberty.
The what led US to this is the fact that we had the Eurosport player and we were going direct to consumer for several years, we've learned a lot about that business and one of them is that you need a lot of content. The actual live sports IP you need local.
And you need something that you that people can always read or learn about or transact with and so after a lot of work JV Eni and Jay came to this conclusion that if we do get golf, it's the best IP in the world because it's it's 52 weeks a year.
It's four days a week of loads of IP.
And 50% of the PJ tours local than we added in the European tour, the Asian toward Latin American toward that.
And then we did golf Digest, where we you can go in and read about any golf course figure out where to take a valve vacation, so where we're doing very well some of our bigger markets are going to be coming up.
On the first of this year over the next by three years from now we will have everywhere in the world outside the us, but we're also attacking the U.S. now as well with golf digest and with that and with Tiger.
JB just thoughts on direct to consumer because I think what let us to golf is a lot of what youre doing in in the international space I think on the golf piece particular drew.
The Great news there is also a bit of a two for one we have the great traction that Alex and the team have developed on the product itself in our direct consumer App and as you said, it's early days, but we're seeing great traction and pick up in the first six months of the year as the product is launched and it's also helping us on our core traditional business, which is I know you've heard us talk about the fact that in markets like Japan, and Spain, where those markets were up earlier this year.
Not only do we expand our relationship on the direct to consumer side, but we leveraged at for our entire portfolio.
To expand and strengthen with great revenue on our core.
We have other key markets like Korea for example to come up next year.
And that's a market that today in the discovery legacy business is way under served it's a very small market for us and we're using those conversations there to see if we can actually develop additional channel opportunities.
In our core business and so you're seeing that two for one.
[laughter] opportunity of great digital and direct consumer traction that it will take continue to take time and accelerate over time, but also more immediate impact of helping our core business through traditional affiliate relationships and broadcast relationships in those markets, which are allowing us to launch.
And accelerate the growth in a couple of those markets.
Thanks, and if I could get a follow up in for probably for good or.
I wanted to ask about.
You asked networks margins.
Yes for the past two quarters have been hitting 60% OIBDA margins here. Historically this is a business that had more typically been caught the mid fiftys, maybe even low fiftys in certain years.
I understand your comments about serengeti and some content, but yes, as we look out over say the next 12 to 24 months is this a business that you think or segment that you think could hover in that high fiftys, maybe even low 60%.
Vicinity.
Yes look I mean drew.
A couple of points number one.
We have been enjoying massive cost synergies from the integration with scripts and obviously a lot of the US footprint was was sort of.
One for one overlap so so that's why you're seeing such a significant.
<unk> share of our cost out hit the U.S.
Number two is I have made this comment a little earlier already we got to look at this from a total company basis, because we have been.
You see some increase in corporate expenses, which is sort of cost moving out of the out of the U.S segment.
So all in all from but from a total company basis.
Another.
400 basis points of margin increase in the second quarter and as I said when we presented the first quarter result, we do not manage the company for margin. The reason why we are seeing that margin increases just all that.
Cost savings coming through but it's not an objective from for me to keep increasing margins overtime. It's much more important to make the right investments in the in the topline and you're seeing some of that topline growth come through now.
Which I have guided to previously as well.
That being said.
If you if you look at the US business I see no reason for margins to decline in the core business. There's none of that however, as you know we are working on a couple of investment initiative in that as I said earlier. The first part has really hit a little more in terms of incremental expense.
That may change next year, when when we start rolling out.
Products like the beat the BBC factual product gets on are those those are obviously also going to drive costs in the us footprint, but again its two very separate world a highly efficient highly cash generator for business that's in absolutely perfect shape.
You've heard our guidance for both AD and affiliate revenues gives us a lot of runway and then the investments in in future growth.
Great. Thank you appreciate it.
Thank you. Our next question comes from Doug Mitchelson with Credit Suisse. Your line is open.
Oh, thanks, so much I guess a couple of questions first David you teased us at the end of your prepared remarks with comments on food at home.
Being reshaped in two distinct and direct relationships with fans around the world. So if you could talk about the opportunities.
You see in that regard and I think.
Well for both you and going or look when you start to roll forward to the end of the year, you'll be at the bottom of your leverage target range. You know I think you've talked about you know the sort of run rate are approaching $3 billion or free cash flow annually. When you look into next year that means $3 billion costs.
Of excess capacity are you seeing strategic opportunities to invest that on an inorganic basis, you've certainly been looking for a while so any thoughts on that would be helpful. Thanks.
Okay.
Look I think directionally in terms of the industry. This is another area, where things are moving our way you talked to Hans and he's talking about Fiveg you talk to Randall is driving Fiveg what is fiveg.
Gee is not about being able to download a movie in six second in two seconds versus seven seconds, it's about providing real utility and value in the home and the question is okay. Now that we got it what do we do with it and this is where the content that we have.
Hey, whoever can own the kitchen is going to own the home.
And we have people spend money they spend that in the home they spend it on their their home office on their living room on their kids room, and so we have these genres.
With food and cooking and with H.G. and now were de Iwai, we'll be relaunching as Magnolia with chip and Joe we have the greatest experts in both of these areas we have credible.
Content needs to be curated purchases need to be curated and if you. If you look at what everyone else is doing with scripted series of scripted movies, they're creating fantastic robust better than ever.
Viewing experiences of script of movies and series and the and that's great. So you can watch flea bag, which by the way is one of the is one of the all three production companies.
And one of the big hits on on Amazon. So all you can do is viewing that's great. You can view it laugh will cry, but that's it you just view it our content has a real ability to view and do or view and transact. So imagine a world where you've got a lot of people fighting for subscribers.
That that people pay a monthly fee for.
And all they can do his view, but our content has subscribers, but they could also transact.
That's true in food, it's true in home, it's true in golf, it's true in cycling and if you go back to the world that that Malone help create.
In terms of full circle in over 100 channels and then he has HSN and QVC the owned but in running QVC and HSN and creating a lot of shareholder value along the way it was and it's completely inefficient than a lot of the people that were on food at home were going over and trying to get an audience to come over and spend time with them on QVC or HSN and buy stuff stuff that they really wanted that needed to be that they wanted to know what is the what's the best what's the best who kitchenware and so what we can do over time.
And we're fighting like Hell to do it is.
We can aggregate these passion groups not only are they going to view with us.
But they're going to be able to do with us. So we view the home and Fiveg is we're having discussions with everyone. How do we take all of our expertise all of our talent or and and and all the content that we have and create some real utility. So I would say stay tuned, but you know the the Holy Grail is to aggregate audiences globally that have a passion and then to be able to have them hit a button and go on a golf vacation by the golf clubs that they love, where what Tigers wearing.
You'll get a recipe and get and get all the groceries. So.
That's what we're working on we're working real hard on it and stay tuned.
Thanks, and on the on the M&A side.
Well, let me start I mean, you you made reference to leverage on the free cash flow. So just.
Before David answers. So the M&A question continue to be Super excited about our free cash flow a development you saw the 2.9 billion end of Q2 still after 200 million of cash restructuring have also spoken to the sort of key puts and takes for the rest of the year.
A good part of that.
Cash tax increase has already come through in the first half, whereas some of the Capex increase in digital investments are going to kick in a little more in the in the second half of the year, but bottom line is feeling feeling very good and we really only just started on on free cash flow improvement.
As you saw leverage has come down slightly 3.5 to now 3.3.
Also probably not a bad thing in the in the current environment. So so happy with that.
Progress as well and regarding M&A and David will add more but we're very very happy with with with our hand.
But obviously continue to evaluate strategic opportunities, but David is there.
Anything else you want to we're always looking opportunistically.
But we don't see anything significant at this point.
Bruce Campbell in JV, or we kicked the tires on everything we have the UK TV deal was quite good for us I mean.
Maybe a teeny update on that and what you are looking at some of the things that you're that you that you think could make so we do see we do see opportunities as you know part of our strategy is as we bought the scripts assets is to really try and take a H.G. and food around the world and we see there is an opportunity there we have selectively looked at at bringing any other assets that help us rebrand UK TV as an example, we'll bring in there to food and home channels into the portfolio on a consolidated basis rebrand the major energy and food network and then take those off and really trying to drive that with the scripts content.
As the bedrock of it.
And then there is additional channel opportunities, which we're looking at selectively to accelerate the core where we can buy channel positions.
Or slots to get some of those channels launched in additional markets. In addition to organic ways that we're doing it. So we do see opportunities on the sort of small or mid scale to tuck in and roll in some.
Things that we think can help accelerate our core business and there are some smaller players that are.
Yes, they are coming to a JV and saying you know you are much bigger I have a lot of infrastructure and costs here are there some things that we could do together and so in some cases you've created.
Advertising country by country advertising groups and tucked in some smaller players where we've gotten the benefit of CPM. There are others that want us to.
Do things for them will want to tuck in with us because.
It's tough to be playing in this space in 200 countries. When you have where you have to we don't have a lot of scale.
All right. Thank you all.
Thank you. Our next question comes from Ben Swinburne with Morgan Stanley . Your line is open.
Thank you good morning.
David or JV when you look at your DTC portfolio I think you've got for services in the market and I think you've listed out seven.
In your prepared remarks, and just curious how you think about.
The longer term strategy are you looking to sort of build specific verticals and kind of tie those verticals backs. Your linear brands or are you also thinking about potentially pull in some of these together for example, you know the sort of Magnolia food and cooking.
Yeah factual stuff into a single App I'm just wondering how you think about how the universe evolves given the sort of the explosion of.
These kind of streaming services around the world.
And and also how you think about porting used to the U.S. or if you view the U.S. market is sort of fundamentally different just given the maturity of the.
Paytv model here.
And then just on the same topic, maybe for good or on the numbers.
Can you help us at all think about that 300 to 400 million as we roll into next year.
If you have line of sight, there yet are willing to talk about it but do you expect to start scaling that cost base or do you expect investments to ramp and lean in more.
Any color at this point would be helpful. Thanks, guys.
Great. Thank you.
Well look I have talked a lot about us aggregating IP and being the leading global IP company. We now have a company that is growing mid single.
In its core business even against us.
Investing significantly and and hold and on as onerous as as you see the BBC natural history Library all of the most of the PPA most of the the the PPA and the European Tour and most of the golf in the World and so most of the cycle out of the cycling in the world. So we've been adding up all of this IP, because we believe being above the globe.
He's going to give us a huge opportunity to create significant value and if some of it works in ways that we think we could create real businesses that you guys give a huge multiple to in order to do that and we've been trying it for a while we've learned a lot.
And what we're doing different than anybody else's.
We have core new media and digital people running these businesses now we had out are we at our existing real we had great TV cable strategic business executives that were doing all these things a few years ago and we were in the trenches fighting talking to consumers dealing with platforms and in the end we said.
We got to bring in the pros.
And so we brought in a fire see who built a marketplace and work that Amazon for more than a decade.
We brought some of the best product people from Amazon over here, we brought two people from Directv.
One that bill Directv from 12 million subscribers to 20 that all about Sac and subscriber acquisition.
And Karen lever and debt and Alex Kaplan, who build Sunday ticket and so we brought people that do this for a living and I saw this when I was on the board of serious it's a different business subscriber acquisition. So we have a whole new team and we've hired we have well over 100 engineers, we have a whole team that we're building in Redmond, and so we see that as a real separate company that is going to disrupt our our industry.
But we're not going to disrupt ourselves by getting somebody who who ran eurosport to now build the eurosport player and build our golf business. We're hiring the people that are that were disrupting us and so I think that gives us a one advantage but to be a little bit.
Colorado.
I think Brian to your question and to the earlier question also about how we scale. The reality is we don't look at in the traditional lens, we look at our competitors as the normal lot that we talk about the business and the MVC using the CBS is in the direct to consumer world.
All of them are trying to build out these.
Supermarkets a video.
And it's very expensive and so far very cash flow negative.
Our strategy in that space is frankly, less about them as competitors and more about building out what we sort of look as much more specialty stores.
And in those specialty stores. Unlike them, we're building out services that are only watch.
We are watch play learn by.
And that's that's how we see ourselves as very different and we do see ourselves as having a portfolio of these some may be.
Over time, 10, 2030, 40 million subs, some maybe single digit million subs, but that portfolio in aggregate.
We think has huge potential when you roll it out globally.
Right.
And then maybe on your second question regarding scaling digital expenses. It's it's obviously a little bit too early to talk about guidance for next year, but a couple of points.
I want to make that we have.
We have spoken about in the past as well we will be flexible here and we're not afraid to get behind what's working if we if we if we're on something.
But just the same way we've also pulled back on some other.
A product, where we didnt see the progress that we that we needed to get comfortable with additional investments and so so expect us to be.
Aggressive if we're onto something and very careful where it where we're not seeing the progress the progress that we need and again, if you look at it from a.
Top down perspective, spending somewhere between five and 10% of our underlying a little bit up for for future growth doesn't sound crazy, it's not betting the farm, but on the other hand, it's enough to potentially it make a difference.
Sooner rather than later.
Yes makes sense, thanks for the color everybody.
The last point is the cost of driving these.
So I've talked about this before but we have all these channels, we have free to air channels with a leader with the equivalent of NBC and CBS and a number of markets in Europe , we have 10 to 12 cable channels everywhere. So.
People are watching less in these affinity groups already and we have scale and so the ability to to we don't have to go out and buy an add to tell people to sign up for a particular product we can be promoting it from the ground up which I think is a is a real helper and finally in a really confusing environment.
The the real question for the future is curations, what the Hell do I do.
I've got a choice of everything and so you have the all the old media, saying come to me I got great movies and great scripted let me tell you about this next great. So scripted series I have and spending a ton of money in order to tell people come to Amazon I got flea bag and I hope the crown is back come on come good re subscribe or don't we're don't churn and for US we have existing infrastructure. So and that's one of the reasons that the PJ came to us.
For for a fine company you have to have existing.
Infrastructure and we have personalities.
You know when people don't know how to cure rate. They go to personalities that's been true.
For the year.
For as long as time, and so you want to know what's going on in in golf.
Talk to Tiger Woods or talk to the PJ players. If you want to know what's going on in the home talk to chip and Joanna gains they'll curated for you you want to think about how to make your life better.
Come talk to Oprah and she will make a lot of recommendations view about what you can do and what she loves and so we're a company of those we think those personalities are going to be real bridges to Curations property brothers.
Thank you.
Thank you. Our next question comes from Michael Nathanson with Moffettnathanson. Your line is open.
Thanks, I have a couple for David JB first one is you guys called out the growth in international viewing share and I wonder how much that share can you attribute to the scripts integration I know that was one of the assumptions you had the scripts, which helps or anything you could share about what you've seen with Scripps is content internationally and can you quantify for international how big is that is the benefit from those international players that you've developed so is that becoming a meaningful driver of the growth that you're now talking about.
Yes, Thanks, Michael.
So for the international share and audience growth is really driven by two or three factors number one is.
Our core organic content, we've been working hard to try and improve the performance of its local commissioning better.
Investment reviews on our content commissioning and re commissioning and so we're seeing stronger performance of our organic particularly local content in some of our biggest markets. The second is we've obviously been a year into.
Making the scripts content work hard largely initially on our own networks to try and strengthen and see how we can actually introduce audience is because I think part of this that people forget is a lot of these content types in some markets, where the kind that was not yet seen you need to introduce that we've seen this in Latin America, where we had the scripts content actually licensed in on our networks for several years and it took almost 18 to 24 months initially in those markets several years ago to get the audience is introduced to it.
Accustomed to it and then liking it.
And what's great is we track now month to month the performance since we started hearing this content in sort of a third and the second quarter third quarter last year and Weve seen continuous improvements in the performance of the content on our existing networks. So thats a second sort of key driver. The third is we are obviously now seeing opportunities to launch whole channels.
Which you've seen us do in Germany, We're obviously rebranding in the UK with the UK TV assets, we've launched a series of channels, we have commitments for more launches in Latin America for HGTV and food to get those channels, almost 50% plus distributed across the market.
And so we're seeing a big opportunity there the monetization is coming I'd say, we've only seen the beginning of it because at the end of the day, we've seen the beginning of it from a a licensee perspective in the markets, where we launched those channels as pay and the audience improvements, where we put the content on our existing networks are what we haven't seen yet, which Dave talk to which the team here in the U.S. do so well is really the strength of these assets is the endemic categories that they own.
And the ability to from an advertising perspective sell sponsorship at high CPM.
Packages to these endemic categories and that's the piece that we're continuing to rework and we see great upside over the next several quarters as we get better and better internationally, it's selling that endemic category uniquely now that we have the channels and the product working better over time, So we see continued growth.
On the distribution side, and we see an accelerating growth from the beginnings of being able to monetize those audience is much better in this endemic categories can add one point, Michael I mean, if you remember back when we closed the deal we talked about this international scripts opportunity as sort of three layers. The first layer being the cost savings that we got very quickly than utilizing the content on our existing platforms and then we said that launching the networks was going to take some time and we're now at the point, where we're actually seeing some of that happening and contributing to our numbers.
Thank you guys.
Thank you.
Our next question comes from Rich Greenfield with TBD. Your line is open.
Hey, guys. Thanks for taking the question.
Just two quick ones. One on you know David you were talking before about the importance of bringing in Peter Bauer steep because things like churn and subscriber acquisition or new.
I guess as you look back over the last year. What are you learning like how do you keep a subscriber for the full year and how are you. How do you start thinking about what the charge for a service relative to the lifetime value given churn and all the things that go on in a direct to consumer subscription business and then I've got a quick follow up.
Okay.
Thanks Rich.
We learned a lot.
The way people consume content on a on a on a small screen is very different you don't go to with TV and rubber your finger on it and expect it to get to get an updated and when you get up in the morning, and you're paying for something you expect to see something so one of the things that we are very early on is that you need you need.
IP it needs to be updated regularly and we also began to understand that the definition of IP is different than what we thought we thought its just professional content its planet Earth and its frozen planet or it's it's live content on the PA or the U.S. open.
That is that is maybe one of the reasons that they're buying it but one of the other reasons is that they are passionate about the particular area. They are in so the reason we bought golf Digest and the reason that we did the deal with Tiger and the reason that we have a lot of the PJ players working with US is the short form content that they create everyday what they're reading for breakfast, what they're working on what the hain about their game or you know.
So is the content that they're catty takes of them on the hitting practice shops, what trick shot that's all IP, what they're worried about in writing is IP and so one of the what Peter how to build and what we're building we brought one of the best technical people over from Amazon.
As our Chief Technology Officer is this idea of one global platform that we can use for natural history for golf for for Science, and it's we're investing up but it's a lifetime global value that we can put on that at all and so we learn that that you need to multi published through the day, we learned that you need real usable bite size content. In addition to the long form content. So golf Digest is a great example of.
People hanging around they want to see.
What are the best clubs what are the best drivers they want to take up they want to take a putting lessened.
You know they want to learn about way to take a golf vacation in Australia and golf Digest has all of that and when we bought that we also got the authority on golf in the World Jerry Tardy.
And the greatest editorial staff the greatest photo library on golf.
And then we put it together with the PPA and so we would have never done that before but we understood that just owning the tours was not enough and so and then we can true in in one so that's one and the second thing. We learned is if you're in passion groups. We have an opportunity that the rest of those guys don't have and thats.
Free funnel, that's appetizer, driven and pay so ultimately what you might see for natural history, what you might see for NN science off of golf for for cycling.
For for Chip and Joe is you have a funnel like.
Eurosport Dot com is free gets 30.
30 million people a month come there that's that really is an appetizer platform.
And so ultimately maybe there is a 100 million people to come to golf for free.
But they are there.
They are kind of.
Pre screened they they have because they love golf they want to see scores they want to see what people are wearing they want to see what's going on in the golf World and we've aggregated then all those people that love golf, that's an advertising platform that's like a.
Global broadcast network for golf or global broadcast network for home that chip and Joe put together are doing and that free but we make advertising dollars. That's that's the new broadcast network of the future and instead of being trying to be something for everyone. There hanging out there and they go there all the time that's number one and then of those people how many of them want to be able to take the the golf lessons from from Tiger Woods, how many of them want to be able to see all the tours and see them and see them live on their device, maybe it's 10% of a maybe 3% maybe its 40%, but thats the pay model.
And so we end up you're not going to have a lot of people hanging around for free.
Monetizing with advertising on Netflix, but for US we have this ability to create a massive funnel and we've already done it with Eurosport Dot com, where where we're the leader on in Europe , where people come and they hang out with us for free we don't think that Thats a little thing, we think that could be a huge thing if we aggregate people that love these affinity groups and advertise it and put sponsors on it and then you go up to the next level and you pay but we created a whole ecosystem.
Rich then the then just a quick just.
Okay.
No I was going to say the only thing I'd add to David's point is I think a lot of also what Peter is brought in over the last year, which is maybe the less sexy and seeming less but is absolutely critical is what we've been a great content company for three over three decades and inherently in that great stories rely on great creative instinct and got.
On the product side of the World as you know well.
Is much more of a database.
Environment, and Peter has driven a discipline and a cadence now with all of our teams which starts with the data starts with everything we see with the data trying to collect it in a way that we can actually use it and using that to drive better you X better as distribution.
Looking at stream quality buffering rates.
Customer service response times, all the kind of blocked blocking and tackling elements of great product experiences that are still a little bit sort of foreign to traditionally content media companies.
He has brought a lot of that discipline and infused it or direct to consumer organization frankly, infuse it across the entire leadership team.
And I think Thats a lot of also what you've seen on the biggest proof point of that is I think you've heard us maybe talk about the play in the Nordics.
Part of our problem a year plus ago was we had a two star rated app that was not well distributed.
And over the course of the last six to nine months, we now have a sudden have.
A four plus star rated App.
That is getting strong customer reviews, our customer response times have gotten better on feedback and responses to the consumer and so part of the product piece of this has also been a huge improvement we still got a long way to go but is a big step forward for us.
Extremely helpful.
A quick follow up.
I think you are the only media company, that's going to report Q2 with subscriber trends improving driven by the NBP package deals you've signed over the last 12 months.
A bunch of your peers have certainly been talking about the challenges facing the bpd. They raise price I'm just curious as you look at Q2 2019 versus Q1 2019, if you add up all the major DMD PD is the the NBP universe, net growing flat or actually shrinking due to the price increases how should we think about that universe of subscribers.
Well, it's certainly growing again I don't want to go into and do a lot of detail, but its certainly growing and clearly we have gone from some people calling out the have nots.
Not even a year ago to best distribution in the entire affiliate landscape, both traditional and virtual and you'll see that reflected in not only subscriber numbers, but also our our revenue growth rate and look the marketplace here in the us.
It's it's.
It's yearning for for sports and Retrans Slam down.
Prices going up every year.
Extenuating, you won't will pay for the sports network and you pay for the regional Sports network and a sport that every broadcaster also has us has their own sports network and then they use sports to drive retransmission and the ratings on every one of them is going down.
And so there's there's a reckoning there's a slam down that's going to come when that slammed down comes to consumers in the us are going to get the content that they want and the content that that's that they spend time with and then we're going to be like every other country in the world, where we'll have a 20 or 25 dollar service and will have the services that people want and will have a huge.
I will have a huge piece of that because that we have the quality content that people like that they're spending time with and they're not being forced to carry us they're coming to every one of those platforms came to us because we were the top choices of the consumers, but every one of them is being forced to carry retrans being forced with it to carry regional sports enforce the Carlo sports networks, and there's a reckoning coming because of consumers don't like it and all of those MVP. These that are stuck with those fees are pissed and it's going to come a moment when it's enough and that's what you're seeing now you're saying it's enough I'm looking at the numbers and it's enough.
Thank you that was a great answer.
Thank you. This concludes the question and answer session, ladies and gentlemen that concludes today's conference. Thank you for joining and everyone have a wonderful day.