David Zaslav – President and CEO Andrew Warren – CFO.

Michael Nathanson – MoffettNathanson LLC Alexia Quadrani – JP Morgan Chase & Co Todd Juenger – Sanford C. Bernstein & Co., LLC. Jessica Reif Cohen – BofA Merrill Lynch David Bank – RBC Capital Markets, LLC Benjamin Swinburne – Morgan Stanley Vasily Karasyov – Sterne Agee Anthony DiClemente – Nomura Securities Co. Ltd.

Kannan Venkateshwar – Barclays Capital.

Good morning everyone. Thank you for joining us for Discovery Communications 2014 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. After which, we will open up the call up to your questions.

(Operator Instructions) Before we start, I would like to remind you that comments today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management’s current knowledge and assumptions about future events, 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, 2013, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I would like to turn the call over to David..

Good morning, everyone, and thank you for joining us today. There has been a lot in the news lately on consumer disruptions to the video marketplace and the emergence of more over-the-top video options. Through all the innovation and press releases, we believe there remains one constant, it is a great time to be in the content business.

Despite shifting behaviors and new digital offerings, more and more viewers are gravitating to high quality content and we still believe, there are many years of sustainable, organic growth from the continuing global rollout of pay television, as well as more new opportunities to display our content than ever before.

I want to start this morning by putting a framework around Discovery strategy and how we are driving organic growth around the world and building the next-generation of businesses and brands. The five pillars of our global strategy have not changed. First, drive organic growth and leverage our infrastructure across the global pay TV market.

Second, invest in content, format and IP that can take market share and attract new audiences across platforms. Third, take a strategic approach to localization on a market-by-market basis and selectively pursue smart bolt-on acquisitions to augment our portfolio.

Fourth, unlock the value of Discovery’s Beachfront real estate and distribution advantage around the world and lastly continue to deliver strong financial results and drive free cash flow per share growth. We’ve been pushing hard on our first principle to drive organic growth across the global pay TV market.

25 years ago, we launched Discovery Channel in the UK. Today, we have an average of eight channels in more than 225 countries.

Discovery Communications’ now reaches nearly 3 billion cumulative subscribers in every corner of the globe, distinguishing the company as the world’s number one pay TV programmer with the world’s most widely distributed network, The Discovery Channel which is in almost 500 million homes.

Overall, our global business continues its strong organic growth with international now accounting for more than 50% of our total company revenue and growing. That’s an important inflection point for our company, a key differentiator for Discovery and the foundation of our growth strategy going forward.

That international infrastructure has allowed us to build a global brand factory. TLC is now the world’s leading female network reaching more than 300 million homes in over 200 countries. ID is one of the world’s fastest growing channels.

We announced on Friday that ID has reached 100 million global homes with new launches in India and Denmark, that’s an astounding milestone for a brand that did not exist anywhere in the world just five and half years ago. ID remained in the early stages of its growth cycle in every market, including the U.S.

We are building the next-generation of growth with the launch of Velocity worldwide, under both the Velocity and Turbo brands, we are launching our next global platform as a dedicated auto channel. The goal is to reach over a 125 million homes through the end of 2015, creating a very attractive global consumer and advertising brand.

We continue to see strong viewership gains around the world, with our global audience reaching an all-time high in the third quarter with aggregate ratings up 6% year-over-year. Two areas I would like to highlight for their consistent and attractive organic growth are our pay TV business in Latin America and India.

Discovery has 13 brands in 49 countries across Latin America that offer a wide range of content to all demographic groups.

The portfolio has had its best quarter ever with ratings up an impressive 20% in primetime across the region, driven by the Discovery Channel, our lifestyle brand Home & Health and Discovery Kids, an absolute juggernaut in the region and the number one pay TV channel in the key growth market of Brazil.

We have a very strong portfolio across Latin America today and are well positioned with multiple channels in the basic analog packages that are attractive to the emerging middle class around the region and should continue to see double-digit affiliate and advertising growth in the years ahead.

India also continues to be a particularly strong market as we roll-out new channels and brands including the recent launches of ID and Turbo. We now have 11 channels in five languages and a passionate consumer base for our science, technology and natural history programming.

Ratings growth in India is over 100% this year, led by The Discovery Channel, Discovery Kids and Animal Planet. The market remains one of our most exciting growth opportunities for the company.

The second element of Discovery’s growth strategy is investing in content, formats and IP that can take market share and attract new audiences across platforms. In September, we closed our deal to acquire UK-based independent production company, All3Media, through a joint venture with Liberty Global.

This is a long-term strategy to broaden and deepen our IP holdings through this diversified asset that owns 19 separate production companies working across the non-fiction, scripted and sports genres.

In the U.S., TLC remained a top 10 ad supported cable network during the quarter and just last week had its highest audience in four years with 19 Kids and counting making TLC the number one network for the night.

And OWN continues its strong growth trajectory ranked as the number one cable network on Tuesday, Wednesday and Saturday nights for African-American women highlighted by Tyler Perry’s "The Haves and the Have Nots" and the newest hit series "If Loving You was Wrong" and our newer networks American Heroes Channel, Destination America and Velocity continue to build viewership.

American Heroes Channel was up 16% and Destination America and Velocity reached up almost double-digit. Despite these wins our portfolio was not immune to the ratings declines across the TV landscape this summer. Improving our ratings is a top priority here in the U.S.

Our laser focus on quality storytelling is paying off in the fourth quarter with ratings at Discovery Channel up more than 10% in October driven by a strong and balanced schedule. Sundays with Alaska – The Last Frontier, Mondays with Fast N’ Loud and new hit MISFIT GARAGE and Fridays with Gold Rush, the number one show for men on TV on Fridays.

We also recently made a leadership change at The Discovery Channel and announced last week that long time Disney Executive, Rich Ross, the great old friend of mine that I’ve always admired will join the company as President of The Discovery Channel in January.

Rich is an extremely talented, creative executive with a history of producing great content, driving ratings, building strong global brands. He built Disney’s TV channels worldwide and we have high expectations from Rich to draw Discovery Channels next chapter of growth, he’ll be starting early in the year.

A key differentiating factor for Discovery is our content ownership, which allows us to be platform-ready and flexible in how we reach consumers. We produced 2,500 hours of content a year. No other company can say that and we own almost all of it. We recently reached an agreement with Sony to provide Discovery Networks content on their new platform.

An exciting new platform for us to display our brands and last month, we completed a strong renewal with SouthernLINC Communications in the U.S. for our entire portfolio of U.S. networks.

As part of this deal, we expect SouthernLINC’s customers to have authenticated access to Discovery’s content inside and outside the home and start building those new TV Everywhere offerings of the future. Three other platforms, where we are exploiting our IP for learning and new revenue streams are Discovery Education, Eurosport and SBS Nordics.

Discovery is a leader in digital education, reaching over half of all U.S. schools and 35 million students with our innovative digital text books and sweet of educational products.

Discovery Education is meaningful to our top and bottom-lines and exposes our brand to millions of kids in a really positive enriching way and that exposure and relationship allows us to build trust and engagement with the next-generation of media consumers at a very early age.

In addition as part of our Eurosport acquisition, we also picked up the Eurosport player. A strong direct-to-consumer over-the-top subscription product or app that has grown consumer significantly in the last few months. We have also begun to do some great work in the Nordics with a new over-the-top product called D Play in Norway.

With high broadband penetration and strong demand for our content across the Nordics, an aggregated service of our combined Discovery, scripted and sports products has provided a growth in paying subscribers that amounts to nearly a three-fold increase in the past year.

D Play and Eurosport players give us new incremental revenue streams as well as great data for viewing habits on mobile platforms, how to best distribute and schedule, our consumer offerings across linear and digital and help us develop expertise in building new SVOD products and revenue models that are additive to our pay TV business.

The third principle is to take a strategic approach on a market-by-market basis and selectively pursue smart bolt-on acquisition to augment our portfolio, but also looking for opportunities to diversify our content, keeping our local relevancy and add meaningful scale. Last month, we began our latest localization initiative in South East Asia.

Our strategy is to shift resources from our current Singapore headquarters to new local offices in growth markets including the Philippines, Indonesia, Malaysia and Thailand.

Additionally, in South Korea we are investing in a new in-country presence and leadership team following the implementation of the free trade agreement and the ease of restrictions on foreign broadcasters.

In the Nordics, we continue to see the benefits of last year’s acquisition of SBS Nordics, due to our selling and enhanced portfolio offering to advertisers.

In Europe, newly acquired Eurosport is starting to show the benefits of having increased access to compelling sports rights as we have taken a combined Eurosport and Discovery offering to the market. In addition, Eurosport previously relied almost exclusively on Pan European ad sales.

The benefit of discoveries local teams means, we can increase our inventory to sell local in addition to Pan European and local ad markets are significantly bigger than Pan European. For example, a few weeks ago, we presented our combined portfolio for the first time to advertisers at our upfront in Germany.

We announced that Eurosport acquired the exclusive TV and digital rights for MotoGP in Germany and the Netherlands for not a lot of money. These popular high-speed motorcycle races hold strong appeal to sports fans in both countries and are a good example of how we are surgically strengthening Eurosport’s content in two important markets.

Additionally, where we have the rights we are just beginning to sample our new sports content across Discovery’s other platforms. Our new Turbo channel will air Bundesliga soccer matches in Poland. And during the U.S.

Open we add the women’s final matches on our SBS channel can now five to all-time high ratings in Denmark because Wozniacki, a finalist in the U.S. Open was Danish.

Again, just some very early examples of the optionality that this platform will give us to co-sale co-program and build out a combine pay TV offering with more meaningful scale in many key markets. Another part of our strategy is to create the equivalent of regional sports network in the U.S.

by localizing content on Eurosport 2 to make individual channel feeds even more compelling to local advertisers, distributors and viewers. In Sweden, we’ve relaunched the network as Eurosport 2 Sweden with local Hockey rights and customized in the local language with local talent and with the dedicated feed.

The distribution that Eurosport 2 provides could be the basis for a number of strong local channels in the year ahead. Our fourth growth principle is to unlock the value of Discovery’s Beachfront real estate and distribution advantage around the world. Here we are thoughtfully investing in new TV brands and identifying category wide space.

We’ve recently increased our stake in the Hub network to 60%, renamed the channel Discovery Family Channel and the network debut in on October 13th continues our partnership with Hasbro. With reach of over 70 million U.S.

homes, the network features has both studio kids content during the day and Discovery programming for families and parents watching with kids in the evenings and primetime. In the first few weeks ratings are up double-digits and their strong advertiser interest for co-viewing in a quality brand environment.

Our final principle is to continue to deliver strong financial results. Andy will provide more detail on our financial performance, but we had another quarter of double-digit organic OIBDA growth as we expanded organic margins both domestically and internationally and we remain focused on driving free cash flow per share growth.

So with all the opportunities and new platforms, we remain confident Discovery is very well-positioned now and for the future with our strong global brands, ownership for popular non-fiction categories, diversified worldwide assets and strong operating and financial track record.

We firmly believe we can deliver sustained long-term growth and continued shareholder value creation. With that, I’ll turn the call over to Andy for details on our financial results..

Thanks David and thank you everyone for joining us today to discuss our third quarter performance. Discovery’s ability to execute on our key strategic global growth initiatives while focusing on tightly controlling costs led to another quarter of solid results.

On a reported basis, total company revenue in the third quarter increased 14% led by 32% international growth, which is partially offset by 1% decline in our domestic networks, primarily due to digital licensing revenues in the prior year.

Total operating expenses on a reported basis increased 18% mostly due to the inclusion of the Eurosport leading to reported OIBDA growth of 8%.

Excluding the impact of Eurosport, digital licensing revenues and foreign currency movements, total company revenues grew 7% with our strong and successful focus on controlling costs and ensuring that revenues grow faster than expenses. Our organic expense growth was up only 4%.

Behind this 4% expense growth was a 5% increase in cost of revenues as we remained disciplined about our investment in programming while still continuing to gain audience share globally and a 3% increase in total company SG&A.

With revenues growing 300 basis points faster than costs, our organic adjusted OIBDA grew 10% with underlying margins expanding by a 100 basis points versus last year.

Net income available to Discovery Communications increased 10% to $280 million driven by the improved operating performance, as well as increase in equity investment earnings and lower mark-to-market equity-based compensation, partially offset by higher restructuring costs related to Eurosport integration.

We also lowered our effective tax rate from last year’s third quarter by 400 basis points to 35% this quarter as we remain extremely focused on lowering both our effective and cash tax rates by fully utilizing our increasing international business mix.

To this end, as we continue to grow our foreign assets and content production capabilities in critical international markets, we now have land at site to our being able to reduce our global effective tax rate to below 30% for fiscal 2017.

This sustained year-over-year reduction and our tax rate would not only drive net income growth but also accelerate our free cash flow and capital availability growth as well.

Adjusted net income which is a more relevant metric from the comparability and evaluation perspective, as it excludes the impact from non-cash acquisition amortization of intangible assets with $330 million this quarter, a 9% improvement versus last year.

Earnings per diluted share for the third quarter was $0.41, 17% above the third quarter a year ago, adjusted earnings per diluted share was $0.46, a 15% increase. Looking at the last 12 months, adjusted net income increased 21% to $1.3 billion, while adjusted earnings per diluted share increased 27% to $1.87.

Free cash flow in the third quarter of $393 million declined by 10% versus a year ago as the improved operating performance was more than offset by higher cash taxes mostly due to the expiration of the accelerated content cost recovery under Section 181.

Over the last 12 months, free cash flow decreased by 3% to $1.1 billion as the higher tax and content payments more than offset the stronger operating performance.

However, free cash flow per share a critical metric for us and one that most influences our strategic planning and execution was up nicely over the last 12 months as a decrease in our share count due to our aggressive stock buybacks more than offset the declines in free cash flow.

Content spending during the third quarter excluding Eurosport increased mid-single-digits, even as we continue to drive the Euro market share growth across the globe.

Before moving on to the divisional results, I do want to highlight that were not part of our free cash flow, OWN continues to increase its cash flow generation and repay Discovery a net $70 million in the third quarter. And turning now to the operating units, revenues of the U.S.

Networks were down 1% on reported basis through the digital licensing revenues recognized a year ago.

Excluding the impact from licensing revenues, organic domestic revenues grew 3% with advertising and distribution growth partially offset by a $3 million decline in other revenues again primarily due to lower content licensing sales, as we are sharing more programming this year with international networks versus selling the third parties.

Domestic advertising revenues increased 1% in the quarter. We faced the tough comp versus the 12% of advertising growth in the third quarter of last year but healthy volume and price increases this year more than offset lower delivery.

Distribution revenues excluding licensing revenue increased 6% during the third quarter, as we again benefited from the higher rates, we were able to secure during our last round of affiliate negotiations.

Looking at the cost side, domestic operating expenses declined 4% from the third quarter of 2013 on a reported basis and declined at 2% excluding the impact of SVOD. This was primarily due to an 11% decline in SG&A partly offset by a 7% increase in content amortization versus last year.

Our ability to tightly manage cost led to flat reported domestic adjusted OIBDA despite the decrease in reported revenues and led to organic adjusted OIBDA growth of 6%. This resulted in organic margin of 59% up fully 200 basis points versus the third quarter a year ago.

Turning to the other main segment of our business, our International division continue to deliver strong results growing reported revenues 32% and increasing reported adjusted OIBDA 25%. Reported results include the impact of the Eurosport acquisition and foreign currency headwinds.

Foreign currency had a significant negative impact on our results in the quarter. Given the continued strengthening of the dollar versus the euro and other key currencies. The euro and the four Nordic currencies comprise over half of our international OIBDA.

So with the euro down 7% in the quarter and the Nordic currencies each down between 5% and 7% against the dollar, the profit impact was significant. Therefore for comparability purposes, my following comments on our international business will refer to our results excluding both Eurosport and FX fluctuations.

Total international revenues grew 10% as advertising revenues increased 12% and affiliate revenues grew 8%. International advertising continues to be the fastest growing segment of our business and significantly outperforms the overall international ad markets.

There are some small pockets of softness in the third quarter in Russia and neighboring countries as well as certain countries within Asia, we were able to grow organic advertising revenues, a very healthy 12% as a majority of our regions to our ad revenues up double-digits.

Growth was led by Western Europe as we continue to benefit from the success of our free-to-air initiatives in Italy, Spain, Germany and the UK and by the Nordics where we still grew ad sales in the high single-digit range as we continue to see a scale driven pricing benefit across our networks, despite lower net ad sales in Sweden due to their lower put levels.

Latin America remains an incredibly healthy growth market for us, driven by Brazil and Mexico as the Central and Eastern Europe were higher pricing in Poland more than offset political instability in Russia as well as the issue that some advertisers in Russia have started to move dollars out of cable TV to broadcast ahead of the cable TV advertising ban that goes into effect on January 1st of next year.

Asia was soft again this quarter as the tourism category has been negatively impacted by local geopolitical issues in certain key markets. Taking a step back, we expect international advertising to remain the top growth driver of our global business as we see double-digit organic growth continuing for the foreseeable future.

Our unparalleled global distribution platform will allow us to continue to benefit from the rapid evolution of the global pay TV market as we increasingly take share and increase CPMs at our existing networks while simultaneously rolling out our homegrown brands like TLC, ID and Velocity to more and more markets around the world.

On the affiliate front, the 8% affiliate revenue increase in the quarter was driven primarily by subscriber growth especially in Latin America from the continued expansion of pay television in Brazil, Mexico and Colombia and in Central and Eastern Europe from additional subs in Russia and Africa and from new channel launches in the Middle East, Turkey and Africa.

Turning to the cost side, operating expenses internationally were up 7% in the third quarter, primarily driven by higher content amortization and increased personnel costs as we further expand our global footprint. Our ability to grow global revenues in excess of global costs led to 16% adjusted OIBDA growth in the quarter.

Very importantly, we delivered another quarter of strong organic margin expansion internationally with margins on the base business up over 100 basis points year-over-year.

Finally, taking a look at our overall financial position with the strong balance sheet and sustained financial and operating momentum and given our gross leverage targets and long range free cash flow per share growth assumptions, we expect to continue returning capital to shareholders as we invest in our global businesses.

During the first nine months of this year, we bought back over $1 billion worth of our stock including another $298 million during the third quarter and we still plan to return more capital to shareholders in 2014 than we did in 2013. Since we began buying back shares towards the end of 2010.

We now spent over $5.3 billion buying back shares, reducing our outstanding share count by around 25%. Turning now to our full year forecast, primarily due to the considerable foreign currency headwinds, I previously discussed, as well as the significant geopolitical issues in Russia and lower than expected domestic ad sales.

We now forecast total company revenues to be between $6.3 billion and $6.35 billion. Adjusted OIBDA to be between $2.5 billion and $2.55 billion. Net income to be between $1.15 billion and $1.175 billion and adjusted net income of $1.275 billion to $1.305 billion.

We also now expect our 2014 free cash flow to be approximately $1.125 billion for the year. It’s extremely important to highlight that for the non-controllable currency headwinds and the negative impact of the Russian geopolitical situation would have been at or close to the bottom-end of our previous guidance ranges.

Also important to note, these updated guidance ranges utilize current foreign currency exchange rates and assume stabilization of our U.S. ratings.

They also include approximately $20 million of anticipated 4Q content impairment changes mostly associated with our recently announced cancelations of Honey Boo Boo and Sons of Guns as well as the nominal benefit of our now consolidating The Discovery Family Channel which would have past many quarters had reported largely breakeven results.

Thanks again for your time this morning and now David and I’ll be happy to answer any questions you may have..

(Operator Instructions). Your first question comes from the line of Michael Nathanson from MoffettNathanson. Please proceed..

Thank you. I have one for David and yes one for Andy on your numbers. In the past month or so has been lot concerned about the creation of smaller cable bundles within the U.S.

I wonder given the diversity of your portfolio, do you think this is a legitimate concern or just philosophy on working with operators looking to create smaller bundle? That one for Andy..

Okay. There is a lot of, I think press release activity in the marketplace. In the end, I think if the marketplace moves that way, it’s likely to move pretty slowly, people are still watching more TV than they ever have and the duration of the bundle was very effective.

The unbundling, I just don’t see it happening, I think it’s – if it does move in that direction overtime we own all of our content which is in advantage. We’re taking advantage of it with Eurosport in Europe, we’re taking advantage of a little bit with D Play in the Nordics but here in the U.S.

I think you’ll see the pay TV model maybe working this way but even then they’ll be working that way with distributors in a way that is not too disruptive. ESPN has gone in a way that’s very limited for broadband, so I think there are a lot of releases here.

It’s unlikely to have a significant impact in the near-term in the next four, five or six years as content goes directly to consumers.

We have great super fans of our content domestically and around the world and if it moves that way in any meaningful way, we’ll be able to take I think very strong advantage of it because the affinity groups we have, the quality of content that we have and the fact that we own it, we own all of it. So you don’t have to go to anybody for it.

But I think it’s going to get a little more overplayed over the next couple of months, they’ll be a lot of announcements in this question, what’s the price? What’s the platform? Will people aggregate together? In the end, there will I believe be a rationalization, we have a strong marketplace here in the U.S.

basic cable is very effective it’s also going to be a lot cheaper. And if you try and aggregate a few of these direct-to-consumer products..

Okay, David. Let me ask Andy, I don’t think you gave us an update on your verifications for international advertisement growth.

What are we assuming for the fourth quarter for domestic in terms of growth?.

Michael, we’re not providing any forecast in that right now. There is a lot of moving parts with the international ad sales. Well, pricing is good, there is a lot around volume right now. Lot more being brought closer to air and so for us, we had a strong delivery in October.

But we’re not going to give any guidance yet in the fourth quarter as given how close right now bookings are to air time..

Okay. Thanks Andy..

Your next question comes from the line of Alexia Quadrani from JP Morgan. Please proceed..

Hi, thank you very much. Just digging in a little bit further on your commentary on the domestic advertising environment.

Do you find that the softness in the third quarter was largely just ratings delivered because of softer ratings or was it really because there was any I guess smaller budgets or any change in sort of the way allocation spending was and if there is any further insights in that that would be helpful..

Sure Alexia. In the third quarter, if you looked at overall viewership for the summer on cable. It was down that’s coming back a little bit. We’ve seen this outside the U.S. I think it’s too early to call it a trend. There are a lot of markets where we’ve seen viewership come down and then come back up.

So, certainly ratings and in our case, our ratings I think were lower than we expected had an impact. Pricing is fine, the scatter market I would say held up okay in the third quarter.

in the last month or so we feel that it’s gotten a little bit softer so pricing is still I would say pretty steady maybe even good, but there is a lot more scatter out there not just from us but from everyone.

And people are booking closer to time we’ve been booking on some of our networks for this past weekend we were booking on Thursday and Friday for the weekend.

So normally we’d be able to give you a real good sense of where we would be through the end of the year here domestically, but the visibility is not what it’s been that doesn’t mean it’s going to be bad. But I would say for the first month there was some softness in terms of the volume.

And whether that picks up in the next two months or not we’re going to have to see if we do our ratings are doing better, Discovery is doing better, we have some good premiers coming up, we have some strength on TLC with some series coming back strong.

I think we’ll do fine, the question is will the scatter volume be there and we just don’t have that much visibility right now..

And thank you very much. And just a follow-up on your commentary about the – in the prepared remarks about the SVOD.

Are you guys still in conversation I guess with other SVOD players for a domestic deal here and the Sony deal that you had highlighted and if there is any color if you can give us in terms of the potential financial impact of that in ‘15..

Okay. On Sony we were able to structure I think a very favorable deal for us and for them. I think it’s an innovative platform and I think they got good value and we felt that we got very good value so I think that worked that very well.

On SVOD in general, here in the U.S., we continue to talk to Amazon, to Hulu, to Netflix, we think they are strong players in this marketplace, it’s an extra bite at the apple which provides incremental value and for us it’s been almost old drops to the bottom line. Overtime, I think we will get significant value.

The question is whether we’ll get it directly from them or whether we’ll get it by pursuing it ourselves. I expect that right now it’s really just a value issue we could have done deals with all them but we felt that our content was more valuable..

Thank you very much..

Your next question comes from the line of Todd Juenger from Sanford Bernstein. Please proceed..

Hi thanks. Good morning. David I’d love to pick up right where you just left off. And just give you a chance to respond to something I hear a lot I’m sure we all do. So just thinking about as you contemplate the SVOD window, how do you responded to those who say the fact that Discovery hasn’t found a deal that works yet with those players.

Is somehow a signifier of a decreased relevance of Discovery’s content in an increasing on-demand world and I wonder how you respond when people say that – and I have a follow-up. Thanks..

Thanks Todd. Well, we would significantly disagree with that on a couple of levels. One, SVOD is really determining itself what it is. If SVOD ends up being HBO and it’s basically movies and a couple of original scripted series. And the answer maybe that for that platform we’re not at the top of the list.

And in that case I think there are likely to be others that will take the strong quality content that we have and in a similar model reach consumers.

So that’s one is what will Netflix and Amazon be? Will it be mostly movies and a few scripted or will it be a broader offering? We represent now over the last seven years we’ve grown our reach here in the U.S. from about 5% of viewership on cable to almost 12%. And on any given night one of our channels is either number one or two network in America.

On Tuesday nights we’re the number one network in America with Tyler Perry’s content on OWN. Later on Tuesday night, we’re the number one channel in America with 19 and counting where we get over a 3 rating in the demo on TLC.

On Friday nights we’re the number one network on TV including the broadcasters with Gold Rush and they are in scripted series but lot of it well except in the case of Tyler where we have two very strong scripted series, but they’re thematic programs that have very strong viewership, very strong DVR and a lot of social.

So when you look across our 14 networks, we have a lot of great content and so the question is how do we reach consumers and how do we get the value that we deserve for and I think overtime, we will get a substantial amount of value in that window. It may present itself with TV Everywhere is another app..

Okay, thanks. Fair enough. And Andy if you don’t mind just a quick one, as we think about program investment into ‘15, I just wonder given probably a little software revenue environment right now than you wish and you’re putting together budgets for next year.

Are you thinking that you need to increase investment to recover ratings or that you need to maybe lighten up on investment a little to protect margins or something in between and where should we think about content investment for next year? Thanks..

Sure. If you look at what the last – for the last couple of quarters we’ve kind of increased our base content spend, call it mid-single-digits and so we came down from the kind of higher investment period of 2012 and 2013 and we’ve been much more at this kind of mid-single digit range.

I would say that that’s very much our hypothesis for the next several in many quarters. I think it’s the right level of increase for us as we continue to expand our networks internationally and as we look to have and nurture new content domestically.

I don’t see it being really any more than that, we don’t need to, to still generate our market share growth and so I think in terms of base content spend being mid-single-digits for the foreseeable future..

Got it. Thanks guys..

Your next question comes from the line of Jessica Reif Cohen from Merrill Lynch. Please proceed..

Thanks. I’ll follow along the same path as everyone else one for David and then for Andy. David, what trust is really interesting hire for you guys? Given his success at the Disney channel. I’m just wondering what we should look for at Discovery.

Is there any kind of change in content strategy, what are his priorities?.

Well, the good news with Discovery is, I think we have some real upside. We have three nights, we’re at the very top of within the cable universe for [men] but when we look at Discovery and we see what Discovery can do? There are number of markets, where our market share are more than two or three times what it is in the U.S.

in a number of our markets and so I think building on the Discovery is still the number one cable brand in America, by the surveys of cable operators, the brand that viewers most value and so I think that there is even in a flat market like the U.S.

is upside, if we can up our game a little bit with more quality content, with some better storytelling, better characters because when we get it right, the viewer show up and it works everywhere in the world, Rich is a great programmer, very strong creative.

He and I spent a lot of time talking about what Discovery could be and the opportunity to grow it and I think Rich is going to do a great job, we’re going to line up behind him and I think Discovery can have a real chance to get even stronger and for the brand to get even stronger..

Yeah, he had amazing run at Disney. And then Andy I guess it’s like the two part question but how does the hub effect, the hub consolidation effect of fourth quarter numbers you said it was breakeven until now and can you give us an idea of the impact of that the Russia ban on advertising.

What does that mean for 2015?.

Sure. So just on the first question for the hub. It’s about $20 million to $25 million of top-line per quarter it’s what the hub has been driving, mostly around distribution versus ad sales and as you’ve said it really has been for the last many quarters largely a breakeven profit line as the cost for the hub is predominantly match the revenues.

With regard to Russia. I guess it is less than 2% of our global revenues again predominantly distribution revenue versus ad sales for this year relative to our previous guidance. The reduction of our guidance has been predominantly driven by two things uncontrollable things.

First of all, foreign exchange that we talked about unprecedented level of strengthening of the dollar of the last several weeks and that’s been about a $100 million impact on the top-line for the year relative to what we thought back in July and then Russia is about 20 million so those are two big impacts for sure.

But again the key highlight with Russia is less than 2% of global revenues and predominantly distribution revenue..

And for the near term. The subscriber growth in Russia is quite strong. So we’ll get the benefit of that and as Andy said next year, we’ll lose the benefit of the ad sales piece..

Thank you..

Your next question comes from the line of David Bank from RBC Capital Market. Please proceed..

Okay. Thanks very much.

Hey David I was wondering if you could talk a little bit about the contribution to the overall domestic growth rate from what I guess you would call the developed portfolio of the flagship channels versus the developing portfolio and how you kind of see those trends, how the contribution has evolved maybe over the last couple of years and how you see it evolving over the next couple? And then for Andy, you gave us a comment about sustainable double-digit I believe international ad growth for a while but double-digit is a pretty wide range, is there any way you could kind of put a little bit more context around that comment? Thanks very much..

Great, thanks so much. About 70% of our revenue is from Discovery, TLC and Animal Planet but used to be 85 or 88. We’ve launched more channels in the last 4.5 years than all media companies combined here in the U.S. really because we believe if we deployed that capital then we could still grow audience.

So ID is the number, is a top five network in America that didn’t exist a few years ago, it’s the number two network in daytime. Number two in late night and it’s still growing. OWN is the top network for African-Americans and a top network for women and still growing.

Velocity is a great kind of niche network that we’re seeing substantial growth out of, we have AHC which we’re moving into aggressively in the history space and military space in a way that’s showing real growth in Destination America.

So into that 5% growth of market share that we had that’s grown to almost 12 probably would have been 5 to 6.5 or 7 and so I think that strategy has really worked for us.

And it raises two issues, one of the reasons I think we got a great opportunity with Rich is I think we can do a better job on our flagships of growing our audience and the last year or so it’s been relatively flat and so I think that we can, with the right creative leadership we could really drive that.

The second is this environment where we’ve deployed all this capital to launch all these new channels, we’ve done it is because it’s been a healthy marketplace.

And the ability to do that and continue to do that in the future, the whole Comcast consolidation in the industry raises some questions about the ability of independent program as we’re the largest independent programmer in America, to continue to invest in new channels and new niche content that can attract viewers..

And David your question regarding the look forward on international ad sales. We feel still extremely foolish and good about ability to outperform the market as our share of wallet continues to follow the share of viewership. I would think that the third quarter is kind of being a proxy what we see for the next kind of four or plus quarters.

We had 12% growth and that was really driven by still sustained high-teen growth in Latin America, Central Eastern Europe, and Western Europe as again we continue to see great organic growth there and even some good pricing leverage as well.

If you look at the Nordic region, we were able to deliver 8% growth in Nordic as the power ratio, the kind of new focus of that acquisition, we got the cost synergies done, now we’re moving on the revenue synergies.

So we’re seeing really some outsize and some sustained growth out of Nordics, so I would think in terms of sustained double-digit going forward like you saw in the third quarter I would think in terms of still a very strong growth in our core growth regions and kind of in that 10, 11, 12, 13% growth is what we expect for the next many quarters..

Okay thank you very much for that..

Your next question comes from the line of Ben Swinburne from Morgan Stanley. Please proceed..

Thank you. Good morning, Andy on your tax comments, can you just give us a sense for your cash tax expectations overtime I think you said you’d get I think below 30 by 2017 on a GAAP rate.

And if that has any implications for whether or not an inversion might make sense for the company at some point now that you’ve got this line of sight and then if either you or David on the SBS acquisition should we be thinking about that high single-digit growth rate as representative of those assets because I believe that the decent acceleration on how they performed before you acquire them, just trying to get a sense for whether that SBS specific or sort of Pan Nordic for lack of a better term?.

Sure. Ben on the tax one, I couldn’t be more happy and enthused about the progress that we’re making on our global tax structures and rate expectations. We do now see line of sight and first time we already given kind of a long-term perspective on our tax rates and so we definitely see below 30% for fiscal 2017.

The question on the cash tax rate well 181 has had a big impact this year in a negative way by about a $150 million giving the timing of cash taxes relative to that ruling. As we look forward and we see roughly cash taxes being at or 1% below the effective tax rate as we look to maximize the value of deferred tax structures.

So certainly our cash taxes will be kind of at or slightly below whatever effective tax rate once we work through this kind of 181 cycle.

And so with regard to also regarding inversion like it doesn’t change our view on that, as we said before well inversion can make some sense, the key notion is inversion can make a very good deal of great, it can’t make a bad strategic deal good and so we’re taking the hard look, we’re very confident in our ability to still drive down our effective in cash tax rates given international structures and given our now ability to generate more and more content and tax advantage jurisdictions.

So we don’t need inversion to get to a significant amount of tax rate reduction overtime..

Thank you..

With regard to the kind of organic growth story around acquired assets, look for SBS clearly part of our thinking there was around the power ratio, around the ability to leverage that market positioning and grow our already established channels in that market we’re seeing that now I think for Eurosport it’s a very different notion, it’s much more about going from Pan European sale to a local sale I think we can definitely drive a lot more ad sales growth out of that asset across those different markets than we are seeing with SBS.

It doesn’t mean we’re not happy with the SBS ad sales growth in fact 8% is clearly meaningfully higher than market and I think it reflects our power ratio that we’re going to be able to drive for the next many quarters but definitely thinking in terms of for Eurosport and maybe other acquisitions that we look at, there’s not only notion of the combination of market leverage but also the idea of leveraging our local infrastructure, leveraging our local ad sales team to drive much more localized ad sales growth..

it sounds like based on our long-term commentary or medium-term commentary the sort of macro slowdown hasn’t impacted your growth rate in that region broadly at all, is that fair?.

Absolutely fair. it just go back to this whole notion of our overall viewer market share is so much higher than our share of ad sales, the share of viewership versus share of wallet, we still have a long way to catch up and that’s really is driving right now our out performance.

What are the advantages for us is that there was a real retraction across Western and Eastern Europe and over the last several years we’ve gone in hard and we also have a huge amount of content, quality content that we bring into the marketplace that works well when others have retreated with investment but the amount of quality content that we have in language that we can bring into the market is significant and so we see our share advantage continuing to grow and as our share advantage grows we get the advantage of that but we also pickup as our scale grows some power ratio advantage, so we’re pretty optimistic about Western and Eastern Europe..

Thank you..

Your next question comes from the line of Vasily Karasyov from Sterne Agee. Please proceed..

Thank you. David, when you were talking about softness of cable ratings in Q3 unlike couple of your peers I don’t think you mentioned the potential impact of Nielsen measurement and sample changes.

So I was wondering if you disagree that there is a big impact in the decline from what Nielsen is doing and it differs because of your different key demos so if you could comment on this, I would appreciate it?.

We’re talking to Nielsen behind the scenes, I think our job is to drive our channels and deal with the existing currency which is Nielsen.

But when we look at actual setback data, we see a different story and we do think that Nielsen is quite antiquated and I gave an example on our last call that in Norway viewership was down almost double-digit and then they came with the new Q-tone measurement system where you wear a device and anytime you see something or show if it’s with commercials that whether you see at a bar whether you see it on your iPad, whether you see it at your guest home, whether you see it on your computer you get credit.

And viewership in Norway is up mid-teens now in for the last couple of months. So there is clearly a viewership issue and the people are consuming content a little bit differently and they need to catch up. But we’ll work that behind the scenes and from our perspective we need to grow our share and we can’t look and say well it’s Nielsen.

We’ve been able to grow our share every year and we continue to believe we can grow our share every year, we have the advantage that when we do grew that share. We take it outside the U.S. and get a multiple on that share so for us it’s a much more efficient investment. But we still believe in the U.S.

and we just got a focus on telling more great stories and stronger quality content because when we deliver the big audiences come..

Thank you..

Your next question comes from the line of Anthony DiClemente from Nomura. Please proceed..

Hi thanks.

One for David and one or two equivalents for Andy and David I think [prudent] is trying to force a reduction of non-Russian owned cable networks that reside in Russia to 20% or below I know it’s until 16 but is there a way that you can softer that in terms of Russia I guess I mean can you redomicile your Russia cable networks somewhere outside at Russia or how can you avoid being forced to sell those.

And then Andy I was just wondering you mentioned early free cash flows impacted by cash content payments which I presume were higher than reported so can you just talk to us about that difference between cash content costs and reported content spend and over what time period that disparity could unwind.

And then sorry for the third one but final one is just on the scatter market softness just wondering if you guys would attributed more so to a shift to digital platforms or more sort of economic sluggishness in the U.S. or to what it would be attributed to. Thank you..

Okay. Hi Anthony, on Russia look I mean just as a backdrop. The good news for us is we’re in almost 230 countries it’s almost like a mutual funded portfolio. And so there are a lot of markets that are performing much better than expected. And so in the aggregate we’re very pleased with the international business and we’re pleased with Eastern Europe.

The issue we have on Russia is we’ve been there for a long time. And we’ve been able to get very substantial traction with our brands and our content and the world is changing there and it looks like it’s going to change for some time.

So for the near-term we’re not going to be hurt too badly because the majority of our dollars comes from other subscriber fees. And those will continue to grow and we’ll get the advantage of that through the end of ‘16. And what you talked about takes effect at the end of ‘16 with this restructuring.

One is we expect that probably will happen although its two years away and you never know. If it does happen there are many markets that we deal with their – we’re, there are foreign ownership restrictions on broadcasting cable. Usually they’re on broadcast but there are some markets that have them both.

And the question then is do you have great brands have great content that people really want in the market. And in the countries where we have that we’ve been able to get a very meaningful stream of revenue as licensing revenue for our brand as licensing revenue for our content.

And we’ve able to do work around whether ultimately we can do that in Russia it remains to seen we have I would say more powerful content and more volume in Russia than we have in lot of other markets because we’ve been there for so long.

And when you wake up in Russia and you put on Discovery you put on science or you put on Animal Planet there are three of the top channels on pay TV there and they’re viewed as Russian channels. And so we’re optimistic that we can get some significant work arounds, but the question we’ll just have to see how it plays out.

On scatter it’s very hard to tell I mean the – all of the feedback that we’re getting and I spend a fair amount of time on the last couple of weeks with Joe (inaudible) who run sales for us one of the best in the business.

There is no question that the last month, the things have slowed, there is no question on the volume side there is no question that there is more scatter in the marketplace. And there is no question that advertisers are holding their wallets closer even on the movie side and kind of coming in in the late bursts.

We really can’t say where it is, our sense is it’s good to be a little more cautious about how to deploy capital. But we have the holiday season coming up and we just kind – we may be surprised that it does very well and we may continue to be slow the way it is. We can’t really tell where it’s going right now..

And the question on the cost and more versus cash. We still have as you saw in the third quarter a few point disparity with expense being higher than cash really driven by two reasons, one there is still bit of a catch up based on the prior year level of increased investment.

But also the fact that they we do have more a live events we have more 10 events that have a shorter and more window. So as I kept this from significant in the last several years and it used to be kind of a key level of expense growth now we’re down to kind of high single-digits.

I do think it will be still probably a year plus until we really have parity between kind of the mid-single digit cash growth and mid-single digit (inaudible) growth. There is going to be a bit of a mismatch based on the two factors I mentioned..

That’s helpful. Thank you..

Your next question comes from the line of Kannan Venkateshwar from Barclays. Please proceed..

Thank you. Just one question from me, recently there was a lot commentary coming out of Comcast on their perspective on the content agreement with Discovery and so on. Just wanted to get your thoughts on how you’re going about that renegotiation, I believe that comes up next year. Thanks..

Yeah, thanks Kannan. Look we continue to examine from our perspective that transaction and we have some concerns we’re looking at it closely. Everyone should be concerned. We’ve seen similar market dynamics before we’re in 230 countries. In countries where there is a dominant ops and e-power.

It creates real challenges for consumer and in many cases in almost all cases there is a retraction of consumer of investment and content. And so it’s – you look at Comcast there in 17 of the top 20 markets, they pass 70% of broadband in America with probably the best speed and it raises real issues that all of us are looking at in the business.

I think that’s why in terms of the timing, things are getting pushed out and I think rightfully so. The Justice Department and FCC are now talking looking at this very, very carefully, we’re now looking at probably early summer. There is real issues that just raises. And our deal comes up next year as David [Kone] mentioned.

And that we always deal with our distributors in the normal course. Our deal is up in less than a year with them and we’ll see how it goes. We have issues and I think all the content players in the industry as well as the broadband players should be looking at this very carefully..

Alright..

Okay. Thank you everyone. Thanks for joining us this morning you can give me a call if you have a follow up question..

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day..