Good day, ladies and gentlemen, and welcome to the Discovery Communications third quarter 2016 earnings call. At this time, all participate are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Ms. Jackie Burka, Vice President, Investor Relations. Ma'am, please go ahead.

Good morning, everyone. Thank you for joining us for Discovery Communications' 2016 third quarter earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer, and Andy Warren, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at www.discoverycommunications.com. On today's call, we will begin with some opening comments from David and Andy and then we will open up the call for your questions. Please keep to one question so we can accommodate as many people as possible. Before we start, I would like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our annual report for the year ended December 31, 2015, and our subsequent filings made with the US Securities and Exchange Commission. And with that, I will turn the call over to David.

Thanks. Good morning, everyone. I'm pleased to join you this morning during a very exciting time for the media industry. As the industry continues to evolve at an increasingly rapid pace, we know that powerful and love content is still king. Discovery remains focused on diversifying and augmenting the value of our global content portfolio of strong brands and franchises in over 220 markets around the world. We have continued to strengthen our traditional Pay-TV dual revenue streams while investing to drive additional value on Pay-TV and across new digital platforms. Since our last call, we have made some key strategic investments. We have seen expected but still difficult third quarter advertising results, in part due to the Olympics. We have completed a major US distribution deal, and we have watched a continuation of strong trends in distribution revenue, which are 50% of our US and 50% of our international businesses. That long cycle, domestic and international revenue mix makes Discovery unlike any other US-based multi-channel network company. Today, I want to talk about five major developments since our last earnings call. Our new CFO, two strategic investments, the financial foundation provided by our large distribution deals, and gains in our digital rollout that bring increased focus on our digital monetization. First, as you know, Gunnar Wiedenfels will join us early next year as CFO. Andy Warren has graciously agreed to extend his contract term to ensure a smooth transition of CFO responsibilities and a big thank you for that, Andy, and for all of your service, great service over the past five years. Gunnar's experience as CFO of publicly traded Procebin is perfectly aligned with Discovery's future and growth portfolio. Procebin, one of Europe's major media companies, operates multiple broadcast and cable networks and is also Germany's leading online…

Good morning, everyone. Thank you for joining us today. As expected, and previously communicated, our third quarter was challenging, but our financial and operating trends in the fourth quarter are much better and our robust full-year outlook is still very much intact. Importantly, as David mentioned, while the media landscape is rapidly changing, Discovery's global content portfolio of well-loved and increasingly diversified brands makes us uniquely well positioned for long-term growth. Half of our revenue base is derived from affiliate, which is well positioned for strong and sustained growth, given the multi-year nature of our contracts with built-in price escalators. We also remain highly focused on controlling our non-content operating cost growth while thoughtfully investing in content and OTT platforms. As we have consistently highlighted, two of our most critical competitive advantages are our flexible cost structures and the fact that we own or control the vast majority of our content across all global platforms. These advantages give us tremendous operational flexibility and optionality and allow us to fully maximize our long-term profit growth. Now, let's dive into our third quarter results. Excluding currency, total company revenues were up 3% and adjusted OIBDA grew 1%. Net income available to Discovery Communications of $219 million decreased versus the third quarter a year ago, primarily due to a $50 million or $0.08 per share non-cash after tax write-down of our Lionsgate equity position. Earnings per diluted share for the third quarter were $0.36, and adjusted earnings per diluted share was $0.40, down 15% versus last year's third quarter. Excluding the $0.08 impact from this one-time Lionsgate write-down, third quarter adjusted EPS would have been $0.48 up slightly year-over-year. Excluding both, negative currency impacts, as well as the Lionsgate write-down, adjusted EPS was up 5% for the third quarter, and up fully 18%…

Our first question comes from the line of Alexia Quadrani of JPMorgan. Your line is now open.

Hi. Thank you. If you could comment – two questions. Well one question is a quick follow-up. First on, Netflix spoke about a movement to sort of non-scripted programming and I want to know if you saw that as an incremental competitor to your domestic business here, or not necessarily because your brand is such a driver of viewership. And then just a follow-up, if you can give us a little color on your DTV Now comments. Will all your networks be distributed on the product? And any sense on what tier they might be on?

Okay, sure. Look, I think Netflix is a terrific company and they've had a lot of success in putting together quality content as well as acquiring content from existing players. And they've been in nonfiction and they are continuing to do some nonfiction. I think directionally, it's – they've moved to be more like an HBO and so I think in terms of where Netflix sits with us, we see them more as a premium service. Both Showtime and HBO also are doing some nonfiction and documentaries. And so we don't really see them as a competitor with our brands. Our focus really has been to get, to tighten up our brands to focus more on nourishing our core audiences so that we have super fans and we can be reaching them and build a steadier and longer viewership on each of our brands around the world. And, we have seen that with Discovery outside the US, which is continuing to grow globally, ID, which is breaking out, has grown over 10% this year domestically, and more than that outside the US, as well as Oprah and Science and Animal Planet. And, so we are really focused on curating through brands and we are finding that our pipeline is strong, particularly because of our leadership with Discovery as the number one channel for men in the U.S. and almost every market around the world. We are a first place that producers are coming to. Also, because of the amount of volume, as well as for each of our other channels, on crime, we are number one because we buy the most, in the African-American space now with Oprah, Oprah has become the number one place. I think focusing on our brands and nourishing our audience is really the key for us for growth and I think Netflix is doing quite well and it just reiterates the fact that nonfiction is strong. On DirecTV Now, we were able to work out a deal that I think works really well for DirecTV and for us. The idea with Now is that they're going to have an opportunity to reach out to subscribers that maybe they couldn't otherwise get and for us, we think a lot of that, at least hearing from DirecTV, is going to be a younger demo or cord-nevers, at least in the initial tranche. But for us, we are well covered. A number of our services are going to be carried and at least 85% of the economics we will be reaping from each subscriber. And, we expect that to the extent that it rolls out and it's meaningful, that we will find what we have found on smaller bundles around the world, that our viewership becomes stronger. So we have been able to secure a strong position which I think works well for us and works well for DirecTV because they have very high quality services to offer on DirecTV Now.

Thank you very much.

Our next question comes from the line of Ben Swinburne with Morgan Stanley. Your line is now open.

Thank you. David, as you move towards direct to consumer, particularly internationally, can you talk about what you think the organization needs to do, operationally? You mentioned some senior hires, your partnership with BAMTech, but in terms of hiring, I don't know if you think you need to get bigger in customer service or in billing software, I'm trying to get a sense for what Paul's job is here in terms of transforming the company to a more direct relationship with the consumer since your digital strategy is all screens, all places. I'm just wondering what the building blocks are that you are putting in place to make that all happen.

Sure. I'd say it's really four pieces. BAMTech and getting into business with Bob Bowman is a big piece of that, from a middleware perspective, as well as access to some additional IP through them. But joint venturing with BAMTech and sharing and investing in a tech platform that we build out throughout Europe gives us a best of class platform that can hold all the streams and provide a very positive consumer interface, which we think is an improvement over what we have today. In addition, we have Ralph Rivera who ran the iPlayer, and that's sort of the – how do we aggregate all the content and how do we offer it? Right now, we are offering it as a broad offering. Ralph is looking at subdividing that to specialty groups. We now have all the majors in tennis. We have all the cycling. We have all the winter sports that we start to break that out into seasons passes and we have started to experiment with that and Ralph will create the content working with Paul. But Paul's job at DirecTV was subscriber acquisition and marketing job. And, that's what he did for Barry at HSN, and that's what he did at DirecTV. He had a team of over 300 people that drove DirecTV from 15 million subscribers to 20 million, and he had dashboards that related to customer service, reducing churn, subscriber acquisition, how do you – where do you go? What are the affinity groups that you go to and how do you attack those groups, at what pricing. And so, we have started to hire a significant number of people. We made the decision to put them in London because we view this group as a disruptor group. So rather than have our existing…

Great. Thank you. Thank you very much.

Our next question comes from the line of John Janedis with Jefferies. Your line is now open.

Thank you. David, over the years, you have talked a lot about programming and the importance of being on brand and I think for the most part, either on Discovery and TLC, but ratings have been a little bit soft the last couple of quarters. So, when you look at improving ratings, is the solution more original hours, is it marketing, is it better measurement? I'm just trying to get a better handle on your line of sight for the turn. Thanks.

Thanks so much, John. First, I'd say that we really view Discovery globally. So this year globally, Discovery is up in a meaningful way. In the US, we are down a little bit. We are still the number one network for men in the US. We still beat ESPN six months of the last 12 months, but we have a group that we are talking to everyday that feels like Discovery is really on brand. We could put more content on there just to get ratings or we could put content on there that would be very US-centric, but we really look at Discovery as a global platform and measure it in terms of how we are gaining share around the world. Rich Ross had a huge success with his miniseries Harley and the Davidsons and we took that around the world and we are finding some meaningful success with that. Gold Rush is back and doing quite well. Alaska: The Last Frontier is back. So we have a lot of content coming in the fourth quarter, I think you'll see some meaningful improvement. But most importantly, the channel is on brand. We have done well with our scripted series and we have some real documentaries that are meaningful that have been on the air, that are reminding people of what Discovery is when it's at its best. So we feel good about Discovery. TLC has been a challenge. But I think we are making the turn. We now have a Sunday night that's really strong with 90 Day Fiancé, where we are number one or two for women on Sunday night again. The overall trend in the last few weeks has been better. But we've worked really hard over the last 18 months on our development and on figuring…

Thank you.

Our next question comes from the line of Richard Greenfield with BTIG. Your line is now open.

Where is Rich? The second time this has happened to Rich.

Next question please

Hello, can you hear me?

All right. We got you.

Oh, sorry. So, Bob Iger recently said that great content may no longer be enough, that you need direct access to the consumer. You're clearly trying to build a bridge in Europe through the Eurosport Direct product, but wondering how do you think about the US if Iger is right? And then just two, AT&T DirecTV is now the largest MVPD, presumably has the best rates for content, including yours, I would presume. To the extent that DirecTV now takes share from other MVPDs across the country, is that a headwind potentially for you and others in the industry in 2017 on the affiliate side?

Well, I'm not going to get into the rates on any specific deal, but I'll say that, look, we had a very good equitable argument when we went into our renewals a few years ago. When we did the deals eight years ago, seven years ago, five years ago, we were getting about 5% or 6% share, and we were getting 4% or 5% of the money. Our share went up to 12% or 13%. We launched ID, it became number one for women. We launched OWN and it was successful. Discovery came back to being number one. And we invested a lot more in content. So when we went out to the, all the distributors, we were able to get a significant step up and double-digit increases. And now we're done with all of our deals and that's true across the board. We were also able to secure good protection for our channels against tiering and real protection that we were going to get carried in a meaningful way in any offering. It helps us that our top five channels or six channels represent about 85% or 87% of the money. You know, exactly what happens with DirecTV now and where that growth comes from, we don't see that as being an issue. We see it as being an opportunity. There's a lot of people that probably weren't able to afford the traditional DirecTV product that may buy that $35 product. And if they do, we're going to have a lot of channels on there. Each of those channels are very strong brands. And we've seen in markets like Brazil and Mexico and in many of the markets in Europe where we only have half of our channels carried, if we can preserve most of the economics, the viewership…

Thanks so much.

Our next question comes from the line of Vasily Karasyov with CLSA. Your line is now open.

Thank you very much. I would like to ask a couple of questions on the international networks. First of all, I think the release calls out Northern Europe weakness but then says that there was volume growth in Southern Europe. Given that the Olympics are a global event, can you explain that divergence, please? And then, do you mind giving us an idea of what Eurosport and ex-Eurosport what the margins are doing there? Because I'm sure the trends there are divergent in terms of operating expenses growth and advertising and (46:27) revenue growth so that we understand the drivers a little better? Thank you.

Sure, it's Andy, Vasily. Yeah, so the answer to the question around volume growth in Southern Europe and really it also applies to Latin America and Eastern Europe. It's what we call the power ratio. And we've talked before about the share of economics following the share of viewership, and if you look at those two regions, Latin America, Southern Europe and Eastern Europe, you are still seeing strong double-digit growth there because we just have so much catch up to do relative to the economics following viewership and share. So you'll continue to see us talk about, while Olympics certainly was some headwind in those markets, no question that this – the overall trend of our performance from a macro perspective and from an economics perspective continues to be a great tailwind for us. With regard to Eurosport, look, we don't anymore split out Eurosport, but not only because it's so integrated now with the rest of the business. We go to the affiliate marketplace as one company. A lot of the ad sales now, while we are seeing tremendous outgrowth on Eurosport, given its new platform, we don't think of it as being a standalone entity anymore from a reporting perspective. While margins are a little less, still positive, a little less, given the dynamics of sports rights relative to some of the third quarter ad sales challenges that we talked about, no question the trend there is still positive. We are still seeing a growth in the top line for Eurosport related product and we are still seeing, over the long term, profit growth and margin growth for that asset.

We are seeing a bit of a tale of two cities. If you look at Northern Europe, as I talked about earlier, they have this – they are uniquely seeing putt levels decline over the last two years, and we are all feeling that. A piece of it is ratings, which we think we can correct, but a piece of it is that there's a – there's something meaningful that has happened there over the last two years that has not had any kind of systemic impact in Europe or Latin America, we're gestationally in different positions. So when you look to Northern – when you look to Northern Europe, if you exclude that and you exclude the UK, where Brexit has presented real challenges in terms of the advertising market, we are seeing in Latin America and throughout Europe high single, mostly double-digit growth still. So we are seeing low double across Europe and Latin America, and then we've got a Brexit challenge and we have a putt level challenge in Northern Europe, Norway, Denmark, Sweden where we're fighting that fight. We think we can improve it a little bit, but we can't say right now whether the viewership levels on television are going to continue to decline or ameliorate. Right now it looks like it's a slow, steady decline up there, more so than we're seeing across most of Europe, which is contrary to what we're seeing in Latin America where there's still meaningful growth. And Eastern Europe, we are seeing meaningful growth in viewership as well as subscribers.

Thank you.

Our next question comes from the line of the Anthony DiClemente with Nomura. Your line is now open.

Good morning and thanks for taking my questions. I guess no one has asked about the domestic advertising outlook yet, so we need to do that. You had said, Andy, that third quarter would have been low single digits if you exclude the Olympics. So fourth quarter outlook being flat, is it deceleration? So, can you please just talk about the drivers there? I would have thought you'd had the benefit of the new CPM pricing from the up front. And then just sort of bigger picture on domestic advertising, what are you seeing in the marketplace? Is there a budget shift to the Facebooks, the Googles, and the Snapchats going on out there? And then another one for, a separate one for David, also a question about getting your content closer to the consumer. But more about marketing. So you talked about Discovery Go. You've reached critical mass with that. You've talked about Deep Play, the Eurosport Player, does it make sense to start marking these digital products like Discovery Go more aggressively? And just, at a higher level, how do you think about the returns of marketing these digital products to consumers? Does it make sense at all to do it directly, or strategically, would you rather wholesale your digital content to third parties like DirecTV Now, who in turn do the heavy lifting on investing and marketing? Thanks.

It's Andy, Anthony. So look, on the fourth quarter ad dollars, I'll look at it this way, there's going to be some pluses and some minuses. The pluses are A, clearly still a strong market. We're still seeing double digit scatter over up front, we're still seeing high single scatter over scatter and so the market continues to be our friend and there's good volume and there's good pricing there. So clearly, there's some positive there. We are also still seeing some positives from some pricing on Discovery (51:50) Go, and we've talked about the audience profile there skewing so much younger and more female. So those are clearly still positive trends that exist in the fourth quarter. I think on the negative side, one is the deconsolidation of our digi-nets, due to the deal that we announced where we are combining our assets to get a much bigger viewership share, and, look, the other is the universe declines and some pretty conservative view on our ratings. Clearly, there's some upside potential there. We're seeing some traction. We talked about ID, we've talked about Velocity. But, we've taken a pretty conservative view on ratings and the universe. So, I think we have a real chance to over deliver on that expectation, but we are trying to set expectations right as we think about the next kind of two months.

What's your assumption on the universe? Is it more than 2% or is it 2% on your portfolio sub expectation?

Yeah, it's the same level, Anthony. We've kind of been at the slightly below 2% to 2%. We are not seeing any acceleration there. So we're still thinking about a 2% decline in the fourth quarter.

Okay, thanks.

And on taking our content direct to consumer, we're now in 70% of the country with DGo and we have a strong relationship with a lot of the distributors that are helping us to promote it. So we feel like that's on a good track. We are really working on driving the authentication. When it comes to our sports product, we are putting in place a team that will work on marketing. The best case is, one of the things that you saw with AT&T is it's something that I have been talking about for a year and half that we have been seeing. It used to be the triple play, but more and more in Europe now, you are seeing the quadruple play. You are seeing wireless, broadband multi-channel to the home. There's still some fixed phone, but it's much less relevant as we all know. And so with that type, there comes a commoditization and we saw it across Europe, as BT tried to de-commoditization their platform by owning special IP, you see it with Deutsch Telecom, you see it with Vodafone, you see it with Telenor, you see it in Latin America. So, for a long time I have been saying, that that pipe is getting commoditized. And when you are holding on to that pipe, if there's one or two guys next door that are offering the same thing, it becomes a real challenge and it's almost a race to the bottom. And so we have seen that around the world. And the reach, when that happens is IP de-commoditize the platform. And so, some of the deals that we've been able to do, whether it's with Canal+, whether it's discussions with the mobile guys, which is something we're having now much more aggressively, where everyone…

Thanks, David.

Our next question comes from the line of Todd Juenger with Sanford Bernstein. Your line is now open.

Oh, hi, thanks. Given the hour, I will just keep it to one question here. David, you mentioned before the 14 network brands in the states, something like 85% of economics in the top six. So my question is, how do you think about those other eight networks from both a strategic and financial perspective, and their role in your portfolio? Do you still subscribe to a philosophy of basically trying to invest and grow those and find the next sort of ID, or maybe is the world changing about how you think of those, the role of those networks going forward both in their distribution and their investment and the overhead that's required to maintain them and all that stuff? Just your thoughts there would be really helpful, thanks.

Thanks, Todd. We have been focused on trying to – I think more than anybody else, we have been growing brands domestically around the world, and as you have seen our company evolve over the last ten years that I have been here, we have taken a meaningful amount of investment in content and new brands. So we have gone from investing $500 million in content to over $2 billion. And, as opposed to just growing and defending Discovery and TLC and Animal Planet, there's a number of channels that are having a real impact in the U.S. and around the world that didn't exist; whether it's ID, Velocity, which we call DMax or Turbo around the world, Oprah, which didn't exist a few years ago. And so, if you look at our channels, the top six represent 85% or 87% of the ratings, and 85% or 87% of the economics. That is where our primary focus is, but we have some other niche channels that we are playing around with and they have also been a farm team for us. Some of the content that starts on those channels ends up going to our bigger networks and it's a little bit of a secret sauce for us. Survivor Man and How It's Made started on Science and they became strong performers on Discovery and we are still finding that around the world. But directionally, even though we have between 10 channels and 12 channels, in most markets, we have 8 channels that represent 85% or 90% of our economics or 85% or 90% of our share. And so, that's where we are focusing and as we look at a world that is going to be changing over the next couple of years, we have been spending most of our time making sure those channels are stronger, those brands are stronger, and the people that are watching those networks feel more connected and affiliated with them.

Our next question comes from the line of Jessica Reif Cohen with Bank of America. Your line is now open.

Thanks. I've got two questions. David, you mentioned on your Eurosport, becoming like a Netflix for sports, you mentioned other categories that you were interested in, like science and auto, is that all under Eurosports or is it a European service you are thinking of, or something more global? And the second question is on the creation of Group 9, can you talk about some of the metrics that you are looking at and, you know, when and how will you buy the balance of the 61%?

Okay. Let's start with Group 9. We were doing, with Seeker & SourceFed, about half a billion streams, and we found that those streams actually had very good CPMs, but we needed a sales team, which we had, that was selling those 500 million streams. When we went to talk to advertisers, they liked the demo that we had, but we were like the – we were number 20 in line. So putting this together with Thrillist, The Dodo and NowThis, we get a number of things. One is we get 3.5 billion to 4 billion streams a month, which gives us – makes us the number three player, four player or five player in the space. So already advertisers are calling us saying, we like the demo that you have, we like the scale that you have, how can we do more business with you? That's number one. Two is, there's an ad sales team that's working for Ben Layer, a very strong CEO that's running the whole business, and we'll be able to take advantage of having one big sales team sell the 3.5 billion to 4 billion streams, which is a real advantage. The third is, they have a fantastic data analytics business, which is – we were faced with the question of do we build a very big sales team? Do we build a big data analytics structure? And how do we scale up our half a billion? And so we view this as a three part. We got the 3.5 billion to 4 billion, so we got scale. We have a great sales team as we picked the best and the brightest of all of these companies and Ben pulls it together, and the third is we got a great data analytics structure. I mean,…

Thank you.

And that concludes today's question-and-answer session. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.