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Executives

David Zaslav – President, Chief Executive Officer

Brad Singer – Chief Financial Officer

Peter Liguori – Chief Operating Officer

Craig Felenstein – Senior Vice President, Investor Relations

Analysts

Doug Mitchelson – Deutsche Bank

John Janedis – UBS

Jessica Reif Cohen – Bank of America Merrill Lynch

Ben Swinburne – Morgan Stanley

Richard Greenfield – BTIG

Michael Nathanson – Nomura

David Bank – RBC Capital Markets

David Joyce – Miller Tabak & Company

Jason Bazinet – Citigroup

Tuna Amobi – Standard & Poor’s Equity Group

Anthony Diclemente – Barclays Capital

Michael Morris – Davenport & Company

David Miller – Caris & Company

Discovery Holding Co. CI A (DISCA) Q4 2010 Earnings Call February 11, 2011 8:30 AM ET

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2010 Discovery Communications Incorporated Earnings conference call. My name is Shequana and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star, zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today’s call, Mr. Craig Felenstein, Senior Vice President of Investor Relations. Please proceed, sir.

Craig Felenstein

Thank you, Shequana. Good morning everyone and welcome to Discovery Communications Fourth Quarter 2010 Earnings call. Joining me today is David Zaslav, our President and Chief Executive Officer; Peter Liguori, our Chief Operating Officer, and Brad Singer, our Chief Financial Officer. Hopefully you have all 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 comments from David and Brad, after which we will open the call up for your questions. As is customary, before we start I would like to remind you that the 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 may 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 Form 10-K for the year ended December 31, 2009 and our subsequent filings made with the U.S. Securities and Exchange Commission.

And with that, I’ll turn the call over to David.

David Zaslav

Thanks, Craig. Good morning everyone and thank you for joining us for our year-end earnings call. It’s a great opportunity to review Discovery Communications strong financial results from this past year, reflect on the strategic steps we took throughout 2010 that position us for sustained growth in the year ahead, and discuss some of our top priorities for 2011.

A year ago, we demonstrated how Discovery’s unique business model enabled us to outperform and deliver sustained growth despite the difficult environment. In 2010, that growth accelerated significantly, a clear indication of our ability to capitalize on a more robust marketplace by leveraging our high quality content across our global distribution platform. Brad will take you through our fourth quarter results in a few moments, a strong finish to a year in which Discovery once again generated consistent and diverse growth with both domestic and international platforms delivering advertising and subscription increases. The end result for 2010 was 9% top line revenue growth, and we continued to demonstrate real operating leverage, controlling costs and delivering margin expansion from double-digit OIBDA growth.

The financial success of this past year is just part of our story. We generated strong returns while simultaneously positioning the Company for future growth as we continue to strategically invest in our content and brands around the globe. The result was significant progress in further developing our next generation of growth assets, both from the ratings and advertising gains at several of our emerging networks as well as from launching our joint ventures.

Let me highlight a few of these investments from 2010 and what we plan to do for each initiative in 2011. Throughout this past year, you have heard us talk about the rapid audience gains at ID – Investigation Discovery. That growth has continued to accelerate. ID was the fastest growing network in all of cable this past year in both distribution and viewership, something I haven’t seen in my 25 years in the cable business. ID’s prime time viewership was up 64% among adults 25 – 54, and in the fourth quarter it was the number 29 ad-supported cable network for women. Just last month, it hit another major milestone with four shows delivering over a 1 rating, including On the Case with Paula Zahn, and Stolen Voices Buried Secrets. ID is clearly resonating with viewers and is delivering real value to our affiliate and advertising partners.

ID now has distribution in over 70 million homes with firm commitments to get to 80 million homes this year. With 80 million subs locked in and sustained ratings momentum, ID is poised to deliver even stronger ad growth in 2011 and we plan to further invest in this channel to exploit its full potential. We are convinced ID can be a Top 20 network.

ID was not the only network which significantly grew its audience this past year. Our investment in Animal Planet resulted in viewership gains of 7% this past year among adults 25 – 54. Animal Planet has steadily become a much broader and diverse brand. Its two highest-rated series, Whale Wars and River Monsters, both delivered double-digit prime time viewership growth this past season, and it added several new hits including Fatal Attractions, Animal Hoarders, and Pitbulls and Parolees. It is delivering real advertising growth, and with more returning series than ever before and a great upcoming slate that includes Taking On Tyson, premiering next month, Animal Planet should continue to expand its audience and advertising in the upcoming year.

In addition, in 2011 we will continue to focus on building our other emerging networks, like the Science Channel which found its footing and voice last year and as a result grew its viewership by 22% and grew its distribution to 68 million homes; plus, we have expanded into over 80 countries. Science content works well all around the world, and we’re pushing it.

Last week we rebranded Fit TV, Discovery Fit and Health. The channel is already profitable but with the addition of the advertiser-friendly Health Library, Discovery Fit and Health should be able to deliver enhanced economic value in the year ahead.

While the progress at our emerging networks is essential to the long-term growth potential of our Company, it remains an absolute priority to maintain and grow the strength of our flagship networks, Discovery Channel and TLC. This past year was one of management transition for the Discovery Channel and it still delivered viewership growth for the year in prime time. We developed a very strong foundation for the channel moving forward with existing hits Myth Busters, Man vs. Wild, Dirty Jobs, and Deadliest Catch, Storm Chasers, Shark Week and Swamp Loggers delivered their best seasons ever. But even more importantly, we premiered several new series in the fourth quarter which are really working and attracting big, big audiences, including Auction Kings and Gold Rush.

Gold Rush is the highest rated new series on Discovery since Deadliest Catch. Great characters, great storytelling. And just last month we leveraged the success of Gold Rush with the premier of another strong story-driven series, Flying Wild Alaska, whose debut pulled in the highest ratings for a new series in Discovery Channel’s history. As a result of the strong ratings for these two new hit shows, Discovery was the number one ranked network in cable for men on Friday nights in all of January.

Our recent programming success is already paying dividends. Prime time viewership was up 11% in January, and with a stable of returning hits and a robust slate that includes 25 new series, we’re excited about the direction of the Discovery Channel.

TLC also grew its viewers this past year despite difficult comparisons to a year ago due to the huge ratings delivered by John and Kate Plus 8. TLC is now firmly a Top 10 network in all female demographics and had 31 series this past year average over 1 million viewers. The network is sure-footed and clearly firing on all cylinders.

One of the keys has been their ability to take established hits such as Say Yes to the Dress, Cake Boss, and Police Women and turn them into multi-program franchises with additional iterations in new categories and cities. When you take these franchises and add in returning favorites such as What Not to Wear, special events such as Sarah Palin’s Alaska, and new successes like Sister Wives and D.C. Cupcakes, TLC has a deep and diverse programming line-up to reach the coveted female demographic. Much like Discovery with a stable of established hits and a very promising slate ahead, TLC is poised to build on its ratings strength and deliver increased ad revenue in 2011.

The audience growth this past year at our flagship networks combined with the rapid expansion of our emerging networks resulted in prime time delivery growth across our domestic networks of 7% among our core adult 25 – 54 demo. With the rest of cable as well as broadcast down slightly, our increased share helped us grow domestic advertising by 13% this year. The increase is on top of the unmatched 2% advertising growth we generated in a difficult climate a year ago.

As we look at 2011, we have a great advertising base from the strong up-front pricing we generated, and the scatter market remains very strong with pricing well above the up-front and ahead of the fourth quarter. It is too early to predict how scatter will trend later this year or what the next up-front will bring, but if we can continue to take share in what is currently a robust market, we are poised for strong ad growth in the year ahead.

Another significant area of investment this past year was to further strengthen our portfolio of U.S. cable channels with the launch of The Hub and OWN, the Oprah Winfrey Network. The Hub launched in October and after a solid debut has continued to generate audience growth for Discovery Kids. The Hub has had success reaching both younger demos as well as adults in prime time that are co-viewing, and we will continue to work with Hasbro, a great partner, to grow this asset so we can take a larger share of the lucrative kids marketplace.

OWN had a very successful launch in January with over 18 million viewers tuning in the first week, and the goal of heightening viewer awareness was certainly achieved. We have strong long-term advertiser support and we were able to close a number of favorable long-term carriage deals with distributors. OWN ended its first month with viewership up over 35% compared to Discovery Health, and we’ve just begun to put our original programming on the air. We have 24 new shows slated for OWN this year and we will continue to develop the schedule to deliver on the channel’s brand and promise. We plan to increase our funding to continue on the path to profitability, but with a strong line-up over the next few months that includes The Judds and The O’Neills before Rosie and Oprah herself debut their shows, we’re confident that we can generate sustained momentum in ratings and reach OIBDA break-even in 2011.

The Hub and OWN are excellent examples of how we are looking to maximize the potential of our unique distribution platform by enhancing our brands and programming. And on Sunday, we launched 3net on Direct TV, the first 24-hour 3D network in the United States with our partner Sony and IMAX. This remains an imperative for us and nowhere is that more true that across our international distribution. Discovery was an early entrant 20 years ago into the international pay TV market, and as a result we now have between two and nine channels in 180 countries, an unmatched infrastructure with which to deliver content. Many of these markets are expanding rapidly and we are positioned perfectly to capture a significant piece of the growing ad and affiliate opportunities these markets present. Our team will capitalize on our position by delivering a deeper and broader audience proposition, be it from further leveraging our U.S. content or from driving audiences with high-quality local or acquired content.

Along those lines, you have heard us talk about our strategy to make TLC the next global brand. We’re in the process of rolling TLC out to 100 million homes by the end of this year, when TLC will be the most distributed women’s cable network in the world. Today we are in over 50 million homes, having recently launched in Poland, Russia, Romania, Norway, and Sweden. It’s still early but we have seen significant audience gains in most markets, and in Poland TLC is now the number one cable network for women. If we can build a strong female complement to Discovery around the world, much like in the U.S., it will be a great value proposition for advertisers and affiliates.

Another international priority in the upcoming year will be to continue to drive our HD leadership around the globe. We are the leader in HD channels worldwide with networks in over 80 markets providing us with a distinct advantage as technology and viewer demand evolves. Our investment in broadening our portfolio over the past few years helped drive audience gains 11% across our international portfolio in 2010. The stronger content combined with an expanding subscriber base fueled advertising revenue growth of 23% this year.

In 2011 as our international market share continues to expand through increased viewership and reach, the Company remains well positioned to deliver further ad growth as we capture even larger share of a growing pool of ad dollars in the marketplace.

We are also well positioned in the year ahead to take advantage of our strong balance sheet which was further fortified this year through timely refinancing as well as the free cash flow we generated. Our first priority will always be to reinvest in our brands and businesses, but we will not do so without delivering continued operating leverage. Our margins expanded by more than 200 basis points to 45% in 2010 despite investments in content, and we expect those margins to further improve in 2011 as we continue to judiciously invest in what we put on the screen while controlling our overhead costs and keeping SG&A relatively flat next year.

Our second balance sheet priority is to look for targeted M&A prospects that will allow us to further leverage our existing infrastructure or expand into complementary businesses. We have been very prudent thus far in our M&A activity and you should expect that to continue to be the case as we look at opportunities around the world.

Our third priority with our balance sheet is to further return capital to shareholders. With free cash flow expected to ramp significantly in 2011, we will look to continue to buy back shares under our billion dollar buyback program.

2010 marked the 25th anniversary of Discovery Communications and we’re very proud of how far we have come since John Hendricks, our Chairman, launched the Company from his Maryland garage in 1985. While much has been accomplished since then, what gets us most excited is the momentum we are generating across our businesses. As we look to 2011, we’ll continue to focus on creating high-quality content and expanding our market share globally so we can deliver continued strong operating performance, sustained growth, and further enhance shareholder value.

And with that, I’ll turn the call over to Brad.

Brad Singer

Thanks, David. We appreciate the opportunity to discuss our fourth quarter performance and current operating environment with you.

Discovery continued to produce strong operating results during the fourth quarter with a favorable advertising environment enabling us to enjoy global double-digit ad growth. Total revenues increased 9% compared to the prior year led by 9% domestic revenue growth and complemented by 8% international growth, excluding 14 million of unfavorable foreign exchange and one-time prior year items.

Our total operating expenses in the quarter increased 1%, excluding the favorable currency impact with cost of revenues benefiting from lower content impairment charges than the prior year, and SG&A costs relatively flat. The combination of solid revenue growth and low expense growth enabled us to grow our adjusted OIBDA 16% to 461 million compared to the prior year. Excluding the impact of foreign currency, lower impairment charges, and one-time items, adjusted OIBDA increased 12%.

Net income increased 32% to 205 million, reflecting our improved operating performance and lower interest expense, impairment charges, and mark to market share-based compensation partially offset by higher losses related to our joint ventures. Our free cash flow declined to 203 million in the fourth quarter as our strong operating performance was more than offset by the timing of working capital and tax payments that will be reversed in the first quarter of 2011.

Looking back on our full-year 2010 performance, our ability to continue to consistently grow revenues, adjusted OIBDA and free cash flow demonstrates the strength and diversity of our operations and our ability to execute in a competitive global environment. Our team produced 9% revenue and 14% adjusted OIBDA while continuing to invest in our networks and operations worldwide.

Turning to the operating units, our U.S. operations continued to perform well during the fourth quarter. Domestic revenue grew 9% with 13% ad revenue growth complemented by 7% domestic affiliate fee growth. The robust ad growth was due to the strong performance of our domestic ad sales team and a favorable pricing and demand environment. Our fourth quarter ad growth was reduced a couple percent due to our ratings performance.

We were encouraged by the prime time scatter price tightening throughout the fourth quarter with premiums to a solid broadcast up-front in the mid-20% range across our networks. For the year, our U.S. ad sales team delivered a 13% sales increase, and this was on top of an industry-leading performance we delivered in 2009.

The strong current market conditions continue to exist in 2011, and combined with our solid ratings performance we anticipate our first quarter domestic ad sales to exceed our fourth quarter levels, excluding the impact of the deconsolidation of Discovery Health.

Our domestic operating expenses were flat with the prior year in the fourth quarter as our lower SG&A expenses were offset by higher cost of revenues due to our investments in programming. For the year, our domestic teams’ consistent revenue growth was complemented by a well-controlled cost structure, enabling us to increase our adjusted OIBDA 11% and expand our operating margins to 58%.

Turning to our international operations, revenues increased 8% excluding 2% due to unfavorable exchange rates and a $6 million charge from a non-recurring (inaudible) in 2009. Adjusting for these items, ad revenues grew 12% and affiliate revenues grew 9%, offset by lower program sales and other revenue.

International affiliate revenue was driven by strong growth in Latin America and eastern Europe. Our 12% adjusted international advertising revenue was led by strength of Asian and Latin American operations and achieved despite tough comparisons in the prior year when advertising revenues grew nearly 20%, excluding favorable one-time items and currency impact.

Excluding the favorable currency impact to our expenses, our operating costs were up nearly 8% primarily driven by the timing our of marketing expenses related to the international launches of TLC and Real Time in Italy, as well as higher sales commissions. Excluding the foreign currency impact and one-time items, our international operations increased adjusted OIBDA 9%.

The fourth quarter capped a terrific performance throughout 2010 for our international team with 11% revenue growth and 22% adjusted OIBDA growth. The performance improved operating margins over 500 basis points to 44%.

As we look forward to 2011, we are encouraged that the improved pricing and ad trends we experienced in the fourth quarter have continued through January. For 2011, we are forecasting revenue in the range of 4 billion to 4.1 billion. We anticipated adjusted OIBDA of 1.825 billion to 1.9 billion primarily driven by our revenue growth. Operating expenses are expected to increase mid-single digits in 2011 primarily from higher content amortization I mentioned on our last call as well as from 20 million increase in non-cash compensation expense as we transition to a more traditional public company structure. Total non-cash compensation expense deducted from adjusted OIBDA is anticipated to be approximately 55 to 60 million in 2011.

Our net income is expected to grow to 925 million to 1 billion due to our anticipated strong operating performance, no substantial refinancing charges compared to 136 million in 2010, and lower long-term incentive compensation related to our legacy plan of approximately 65 million compared to 142 million in 2010. Please note that our guidance reflects that we will no longer be consolidating Discovery Health due to the launch of the Oprah Winfrey Network. In 2010, Health had approximately 80 million in revenue and 30 million in adjusted OIBDA.

We anticipate generating free cash flow in 2011 between 975 million and 1.075 billion. We expect to significantly improve our cash from operations due to the growth in our revenue, no significant refinancing payments, and lower cash taxes due to the renewal of Section 181 tax deductions for domestic content production that passed in late 2010. As a result, we anticipate our 2011 tax payments will be 275 to 350 million. We also incorporate in our free cash flow guidance the adverse impact to our working capital of long-term incentive compensation payments accrued in 2010, which will total approximately 140 million.

With our significantly strengthened financial position and strong operating performance, we invested over 750 million during the fourth quarter in strategic initiatives and thoughtfully returning capital to our shareholders. We purchased BBC Worldwide’s 50% interest in the global joint venture of Animal Planet and Live for 152 million. We also incrementally invested 46 million in the Oprah Winfrey Network during the fourth quarter. While we are encouraged by the launch of OWN, we believe based on the current business plan we will likely invest approximately 50 million of incremental funding in excess of our $189 million commitment. The incremental funding is primarily due to increased programming investment as we continue to build long-term value in the network.

In the fourth quarter, we also returned 567 million to our shareholders, repurchasing 67 million under our billion-dollar repurchase plan and 500 million of Series C convertible preferred stock. Since initiation, we have repurchased 194 million of our shares repurchase plan, including 89 million subsequent to year-end, and have repurchased a total of 19.3 million shares since August, reducing our outstanding share count by 4.5%.

Before I finish up, I hope everyone tunes into Discovery for our new series, Flying Wild Alaska and Sons of Guns, as well as Taking On Tyson on Animal Planet and Stolen Voices Buried Secrets on ID, and the return of 19 Kids and Counting and Cake Boss on TLC.

David, Peter and I will now be happy to take your questions.

Question and Answer Session

Operator

Ladies and gentlemen, if you wish to pose a question please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Please press star, one to begin.

And your first question comes from the line of Doug Mitchelson representing Deutsche Bank. Please proceed.

Doug Mitchelson – Deutsche Bank

Thanks very much. Question for David – David, a gentlemen mentioned to me a long time ago the greatest value creation opportunity at Discovery was creating and developing new brands, and it’s fair to say you’ve been about as aggressive as anybody in launching new brands. So the first part of the question how much latent shelf space do you have left? Does that leave a lot of opportunity to create and develop more new brands for Discovery, or should we think of your plate being full at this point with OWN, Hub, ID and TLC? And the second part of the question is on developing those new channels, OWN specifically, given the comments on investing more capital. What should investors look for out of OWN? At what point do you look at the amount of capital going into that channel and wonder if you’re going to get back the value that you’re putting in? Thanks.

David Zaslav

Thanks, Doug. Let me hit the first point. When I got here four years ago, there was no question this was, I believe, the best platform media company in the world. We have 13 channels here in the U.S. and an average of five in 180 countries. And so we’re on this march to build our brands, build our market share, and become a great content company, and we’ve really made a lot of progress with Discovery, TLC, now ID, Science, Hub and OWN. So the ones that we’re still looking at are, one, we have Fit but we’ve think we may have come up with a nice formula there. We have a substantial health library that the advertisers like that gets a nice rating – a significantly better rating than we were getting on Fit, and so we’re putting the health library, which is already paid for, on Fit and rebranding that Fit and Health. So we’re going to see how that goes. That’s a nice platform. If we can think of something else that would create more value—but in the meantime, we think that will be a big helper for us.

And then we have Planet Green and Military. Military is one that we have thought for a long time maybe we should do something else with it. It has good sub fees, broad distribution. We gave it to Henry Schleiff about six months ago, and it’s continuing to grow pretty significantly. In January we saw a big uptick. So we’re going to see what Henry does with it, but we have some confidence that maybe Military can make it. Planet Green we’re probably going to do something else with. It has a fully distributed HD platform. It’s in almost 60 million homes. It has a broad program description, and we think that we could probably do something else with that that would be more meaningful.

On the international side quickly, in most cases we only have two channels that are strong, except for Latin America where we have four channels that are in the Top 20. And so in most markets we have two or three channels that we think we can improve. Rolling TLC out around the world is a big swing to do that, and we’re finding some success; but the great thing about this Company is we do have a number of underperforming platforms that we’re going to be able to work on for the next several years.

On the OWN front, we’re very encouraged. First, we have strong advertiser support and long-term advertiser support on favorable terms. We have, I think, probably the best brand in media and a very engaged Oprah, who is a great creative and a great team builder with us; and we were also able to get a number of long-term cable deals, distributor deals done before we launched that both add some subs and give us some long-term stability in terms of economics.

So now we’re on this journey of building the network and finding the voice. Most of our original content hasn’t launched yet. We’ll be launching it over the next year and feathering it in, and then of course we have Rose and Oprah. And so with advertiser and distribution support, we believe this could be a very, very compelling asset and so you’ll see us—we’re going to invest another 50. We think we’ll be OIBDA break-even this year, but we look at it as a big growth engine over the next couple of years if we could find a strong voice and a strong audience, which we believe we can. This will be a very big business with good fees and good advertiser support.

Doug Mitchelson – Deutsche Bank

Sounds like you’ll continue to be busy. Thank you.

Craig Felenstein

Thanks, Doug. Next question, Operator?

Operator

And your next question comes from the line of John Janedis representing UBS. Please proceed.

John Janedis – UBS

Hi, thank you. One quick question, guys – I’d assume we’re going to see more devices from some of the distributors this year, and I’m wondering from a rights perspective, can you share your views on streaming versus downloading and have you negotiated download rights with some of your partners at this point? Thanks.

David Zaslav

I’ll just hit it broadly. I don’t want to get into too much detail, but with all of the deals that we have in the U.S. and around the world with our distributors, they all have the same basic element to it, which is the distributor has the right to take our content, the full channel through to the TV set, period. And we own virtually all of our content. So to the extent that these other opportunities present themselves to move content around the home and move onto new platforms, we’re encouraged by that and we’ll be evaluating those to see which makes sense for us, how we do it, and what value we get for it. But we feel pretty good about the fact that we own our content and that the consumers seem to want to move content around to other platforms; and if the distributors want to do that with our content, they’re going to have to talk to us and we’ll work to figure out a value that works.

John Janedis – UBS

Thank you.

Operator

And your next question comes from the line of Jessica Reif Cohen representing Bank of America. Please proceed.

Jessica Reif Cohen – Bank of America Merrill Lynch

Thanks. I have two separate questions. One maybe following up on that theme of authentication – as you negotiate your affiliate agreements, which I guess largely come up in 2012, do you expect incremental payments for using the product on different devices? And how do you view it, David, overall – TV Everywhere or authentication. Is this a product for inside the home or outside the home?

David Zaslav

You know, it’s so hard to tell. It’s really going to be based on both behaviorally how consumers want to consume content and the speed of the distributors and technology companies in being able to meet that demand. For us, we like TV Everywhere although it’s really only—so far with all the talk, it’s very small on a scale basis and only still in test phase. But we like it because through authentication, we get a chance to have all of our spots measured and to be compensated; and we also get the chance to create a discussion around value for us. If moving our content around the home through TV Everywhere or moving our content through other platforms creates value for a distributor, then we think we should share in that value. And so we’re going to see where it goes. It’s not our truck to drive but we’re excited about the fact that there are new ways to consume content, and we’ll be aggressive in trying to figure out how to create value for our shareholders.

Jessica Reif Cohen – Bank of America Merrill Lynch

And it’s a separate topic, but the international margins in the fourth quarter seemed to slow down a little bit. Can you talk about 2011 – is there an opportunity to drive margins further? What levers do you have? Are there specific markets where you feel like you could really drive growth?

Brad Singer

Jessica, it’s Brad. With regard to the margins in the fourth quarter, that was largely due to the timing of marketing spend. We had shifted some marketing spend from the third quarter into the fourth quarter to support the launches of TLC as well as Real Time in Italy, and so that’s what—our margins were a little bit lower than they would have been on a run rate basis.

Moving into 2011, we should still have margin expansion internationally. We are making investments in some of our growth markets, but that should be more than compensated by the revenue growth.

David Zaslav

Real Time is a network that we took off of—in Italy, we took off of the Fox platform and we made it a free-to-air; and we thought that we could generate over the long term some incremental value, and so it’s now a broadcast platform in Italy and it’s doing nicely as a Top 10 channel in Italy now for women.

Craig Felenstein

Thank you, Jessica. Next question, Operator?

Operator

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

Ben Swinburne – Morgan Stanley

Thanks, good morning. David and Peter, you mentioned in your prepared remarks targeted M&A and complementary businesses, and I’m wondering if you could just spend a little more time on what your thought process is in terms of putting money to work. I’m guessing maybe international is more an interest than domestic, maybe TV production. I don’t know if you want to do more online with something complimenting how stuff works, but just give us a sense for your thinking today on where you might be looking to invest. And then I’ve got a quick follow-up for Brad.

David Zaslav

Just top line. We’ve been pretty aggressive about looking at all the opportunities, but we’ve been very careful about pulling the trigger and that’s because we think we have very good sustainable growth just by growing into our platform and taking advantage of the content that we own. Having said that, we do think we have a huge leadership opportunity outside the U.S. and so in terms of priority, we’re probably spending more time looking outside the U.S. We did this deal with the BBC which gives us a—we now own a fully distributed entertainment channel called Live in Latin America, and we were able to buy out the rest of Animal Planet and that was done at an 8-times valuation which we think helps us to grow Discovery faster.

In terms of online, we were able to get how stuff works. We brought in a lot of search competency into our Company. We’re working hard on our own to build our online business more in the social media area, but that’s an area I’d put probably at the bottom of the list of where we would spend our dollars. And we’re going to be careful. If something presents itself where we think we can grow faster by doing a deal, we will do it; but as we look out over the next several years, we have a lot to do and a lot of opportunity to grow.

Ben Swinburne – Morgan Stanley

Thank you. And Brad, you gave a lot of detail on guidance for ’11, so of course I’ll ask for some more. But I wanted to try to get two numbers out of you – the international affiliate revenue where visibility may be better than on the ad side, I’m just wondering if you can accelerate the sort of mid-single digit growth you put up in ’10. And on the domestic advertising front, you said the first quarter is accelerating. It sounds like scatter looks really strong right now, your ratings are improving. Do you think you can match the 2010 ad sales growth you put up in 2011 in the domestic market?

Brad Singer

Okay. With regard to affiliate revenues internationally, they should be slightly higher than 2010. We did have a couple deals that were redone when we repositioned some networks, so we don’t have that as much of a drag on the comparisons, so they should be slightly higher. With regard to U.S. sales, the way it’s running right now in the first quarter is—I alluded, or I said outright, which was we do expect it to be stronger than the growth rates in the fourth quarter, and that’s when you exclude the deconsolidation of Health. If those trends continue over the course of the year, we should have very nice performance.

Ben Swinburne – Morgan Stanley

Great, thank you.

Operator

And your next question comes from the line of Richard Greenfield representing BTIG. Please proceed.

Richard Greenfield – BTIG

Hey guys. When you look at the year-end net debt, it was about 3.1 billion. You had 1.7 billion of EBITDA, so your leverage was right about 1.8 times. Brad, I think you said 1.1 billion at the top end of free cash flow or thereabouts. With the 1.9 of EBITDA, that kind of implies that by the end of the year, without any share repurchase you’d be right around 1 times leverage. Just curious – when you think about target leverage ratio, is 1.8 kind of the bottom end of where you’d like to see it? Do you think we’ll get that moving higher, and is that a way to think about share repurchase, and obviously if you made an acquisition factoring in, to kind of where you want to get leverage by the end of 2011? Thanks.

Brad Singer

Our target leverage is slightly higher than where we’re running now. We’d like to see it more 2.5 times. We have put a lot of money to work in the fourth quarter—you know, it was over 750 million, so we ate into the cash balances we had at the end of the third quarter that were over $1 billion, and they were in the mid-400s. So as we move through 2011, we’d like to deploy that capital. As David said, we prioritize it first into operations, second into productive M&A, and then third into thoughtful repatriation. And so we will be building towards that without a specific number to hit in terms of our financial position by the end of the year, but with a bias towards moving higher.

Richard Greenfield – BTIG

Thank you.

Operator

And your next question comes from the line of Michael Nathanson representing Nomura. Please proceed.

Michael Nathanson – Nomura

Thanks. I have a couple for Brad or for David. David, you mentioned in your remarks how strong ID and Planet were this year domestically. Of your 13% ad growth you just put up in 2010, what percentage of ad growth came from those emerging networks?

David Zaslav

About a third of the growth came from the emerging networks.

Michael Nathanson – Nomura

Okay, about a third. And then Brad, looking at your guidance on top line, can you give me a sense in domestic—I think Ben was going there, but what’s your implied estimate or so for the range of ad growth and affiliate fee growth in 2011?

Brad Singer

You’d imply from it is that you’d have a continuation, as we said in the first quarter, of fairly strong sales trends, and the range would imply some moderation to potentially a little bit—to less moderation. So that’s how I would point to the ad sales. With regard to affiliate, our run rate in the fourth quarter would probably be slightly less into 2011 just due to the household formation numbers. We are encouraged the last few months – we’ve seen an improvement in the subscriber growth rates in terms of the fully distributed networks, and that’s how I’d say you should model it out.

Michael Nathanson – Nomura

Okay. And how far into the fourth quarter are you seeing those trends in subscriber growth? You know, how far into the numbers have you got?

Brad Singer

Just looking through the January numbers, which still lag a couple months.

Michael Nathanson – Nomura

Okay. Okay. Thanks.

Operator

And your next question comes from the line of David Bank representing RBC Capital Markets. Please proceed.

David Bank – RBC Capital Markets

Thanks. Little bit of a follow-up on Mike’s question there. If you look at the trends on the affiliate fee side, you guys have a lot of moving parts – you know, opportunities with rebrands or upgrades, and obviously the renewal cycle and what you can get out of TV Everywhere versus maturation of some of the platforms, and even household formation. It’s not really a guidance question about next year, but how would you think about the next couple of years in terms of acceleration or deceleration off current affiliate fee trends domestically?

David Zaslav

Well, we don’t have any big deals coming up until 2012, and then they feather in. It’s not as if in 2012, all of our deals come up. What we’re trying to figure out is—what happened last year for two or three months, the number of subscribers in the U.S. actually went down a teeny bit, and so we don’t know what’s happening. There’s conjecture that a lot of it really had to do with the economy, and then we saw it pick up at the end of the year. So we’re kind of on a boat when it comes to the affiliate. We have good deals. The deals provide for us to get paid on incremental subs on all of our emerging networks. Every digital box that gets deployed has to add our channels, and so if the market actually picks up then we would get the traditional growth, we would get the digital growth through all of our subs. But the only new opener would be if there is a—if a distributor really wanted our content broadly other than through to the TV set, we’d have another conversation. Besides that, we’d be waiting until ’12, ’13, ’14 when our deals come up, and as you could see, our focus domestically and internationally is to strengthen our hand. You know, three years ago TLC was the number 20 network in America. Now it’s a Top 10 or number 8 channel for women in America. So if we could improve Animal Planet, improve ID, make Discovery stronger, Science, OWN – as we improve these channels, our hand gets better and we have more of an opportunity when those deals come up to say we have a bigger market share and we have more people that really care about our content, so we’ll have a stronger hand.

But for the near term, it’s really how the industry grows, so we’re rooting for the distributors.

David Bank – RBC Capital Markets

Okay, thank you very much.

Operator

And your next question comes from the line of David Joyce representing Miller Tabak & Company. Please proceed.

David Joyce – Miller Tabak & Company

Thanks. I was wondering if you could provide some more color of how the up-front market is evolving. Now that you’ve got some more kids network competition, do you see advertisers allocating more in the up-fronts to that genre? And I also was wondering if any other metrics are becoming more favored by advertisers, more of the C3s or what have you?

David Zaslav

It’s really too early to tell on the up-front side. Right now we have a very robust scatter in the first quarter which is stronger, and everybody has come. It’s very broad across all categories; so we’re seeing a first quarter better than fourth. And into the second quarter the strength is continuing, but we’re early into the second quarter. As Brad said, we’re not assuming it’s going to continue to be that strong all year. We hope it does.

In terms of our up-front, we were down in Florida two weeks ago on the content side, getting ready for our up-front. We think we have a lot of good content to bring, but where the marketplace is, it’s too early to tell.

David Joyce – Miller Tabak & Company

All right. Thank you.

Operator

And your next question comes from the line of Jason Bazinet representing Citi. Please proceed.

Jason Bazinet – Citigroup

Thanks so much. I think if you look at the ratings of OWN in the early part of this year, they’re down versus Discovery Health last year, and I think you said that’s because in large part a lot of the new programming you guys are going to launch, as well as Oprah herself, doesn’t feather in until later in the year. When do you think it’s reasonable to begin to look at the year-over-year comps? Is it sort of a Q3, Q4 of this year or do you think it will take a little while for viewers to sort of find their way to the channel and find your voice, as you call it, and we’re really looking to 2012 before we get reasonable comps?

David Zaslav

On OWN, we don’t have that much content on there, so there’s an enormous amount of repeating right now because a lot of our stuff hasn’t launched yet. And so we’re looking at the strength of the brand, we’re looking at the content coming up. I would say over the next six to 12 months as more of our content launches, when we get Rosie on the air, you will be able to see the strength of our original content and the creative vision that we’ve put together. And then when Oprah comes on, when Oprah is no longer available on broadcast and the place to see Oprah will be the channel, I think we’ll see another push. But for now, our focus is keep the content on brand, continue to invest. We believe strongly that there’s room for this niche here in the U.S. We’re launching in Canada in a few months, and we think there’s room for this channel in a number of markets around the world.

Jason Bazinet – Citigroup

Okay, thank you.

Operator

Your next question comes from the line of Tuna Amobi representing Standard & Poor’s Equity Group. Please proceed.

Tuna Amobi – Standard & Poor’s Equity Group

I have two questions. First one is a housekeeping question on domestic advertising. So you delivered 13%, which was clearly a strong number; but I would say that that kind of came in lower than we were expecting. I think I heard in the prepared remarks that it seemed like there were a couple of rating points percentage that—I’m sorry, there was a couple of percentage impact from ratings. So I wanted to get a clearer picture – what proportion of the advertising growth for this fourth quarter was attributable to ratings? And if you can comment on the sequential trends as the quarter progressed for the fourth quarter and kind of reconcile that your expectations which you just talked about for Q1, that would be helpful. And then—okay, I have a second one. Sorry. Go ahead.

David Zaslav

No, no. Go ahead if you have another. It’s fine.

Tuna Amobi – Standard & Poor’s Equity Group

All right. So a completely separate question, perhaps, for David. When you think about your digital strategy—you guys clearly have been leaders whether it’s HD or 3D. And yet when you talk to some investors there’s some perception out there, rightly or wrongly, that Discovery hasn’t been as aggressive as you can be on the new media front, whether it’s driving audience engagement on social media or even developing multimedia applications for things like gaming, whatnot. So it seems to me that your strategy—again, this isn’t meant as a criticism, but it seems overly conservative given the kind of content that you have. So within that context, can you perhaps articulate a little bit better what is it going to take for you guys to begin to more aggressively leverage this huge content that you have, which appears to be more relatively aggressive in that. Is it perhaps related to—I know you’ve talked about in the past of waiting for some kind of online measurement mechanism to be able to aggregate that. Is that something that would be a requirement? I know you’re also part of the CIMM, the measurement coalition. Any comments there in terms of the efforts there would be helpful to clarify that. Thank you.

David Zaslav

Okay, let me hit the first one quickly and then Brad can come over that, and then we’ll talk about digital. Look, October, Discovery really had some very soft ratings. We’ve talked for a long time about the fact that we have some very big franchise shows and that we need to build some new shows in order to get more long-term growth. In October, Discovery ratings were soft. They improved a little bit in November. We had new leadership in Discovery last year. We invested significantly in new series. The good news for us is that in December we launched Auction Kings and Gold Rush. Gold Rush is getting huge numbers, over a 2 rating on Friday nights; and the fact that we now have in January a number of other shows – Flying Wild Alaska and on Wednesday nights Sons of Guns – we now have four new series that are performing or outperforming our four horses. And so where we were in October, where we were kind of waiting for our content to come, was a struggle a little bit; and November got a little bit better. But when you look at December, it’s very promising. It’s early but we’re much more stable now with Discovery. We’re the number one network on Friday nights. One Friday we were the number one network for men, including the broadcast networks; and we have some new shows that people care about. So we lost between 2 and 3 points, so maybe we would have been between 15 and 16 if it wasn’t for Discovery’s softness. But in January, we’re up about 11%.

I don’t know, Brad, if you want to add to that?

Brad Singer

That’s correct, David. So that was looking back on the fourth quarter. As we look at the first quarter, our prime is up 11%. Our total rating is up less than that but still positive across the vast majority of our networks, and so you don’t have that drag that you had in the fourth quarter as it moves into the first quarter.

David Zaslav

And just quickly on the digital piece, we have been consistent for the last several years. We have a great library. We don’t want to put it on a platform that’s going to undermine the core cable, dual revenue stream business model in the U.S. or around the world. You know, years ago when everyone put their content out on the web, we didn’t; and a lot of that content has been pulled back now. We’re encouraged by TV Everywhere. We’re encouraged by some of these new platforms that are subscription-based or any business model that gets us good economic return. And so we will be looking at that.

The one thing we do do very aggressively is we’re a non-fiction company so we have real characters. Characters have fans, and so we’ve been very aggressive with Twitter. We now have 25 million Facebook fans. On a scale basis, on a comparative basis to other cable companies that’s quite high. And we’re going to continue to push in social media because we think that will help us.

Tuna Amobi – Standard & Poor’s Equity Group

Can you talk about measurement, David? Your efforts there and what you expect to happen? Is Nielsen going to come up with a solution, do you think, to online measurement?

David Zaslav

I think that fight—we’re pushing in that fight, but it’s the distributors and Nielsen that are going to have to get us to the finish line on that. Recently Time Warner was saying that that was solved at least on a test basis with TV Everywhere, and so we’re rooting for measurement. It’s important to us for us to be compensated, and it will be helpful for us in terms of reaching deals to put our content on those platforms.

Tuna Amobi – Standard & Poor’s Equity Group

Still on measurement – any progress on the CIMM front?

Peter Liguori

Yeah, we’re involved in that, (inaudible). It’s moving forward. Nothing to say today, though.

Tuna Amobi – Standard & Poor’s Equity Group

Thank you.

Operator

And your next question comes from the line of Anthony Diclemente representing Barclays Capital. Please proceed.

Anthony Diclemente – Barclays Capital

Thank you very much. One for Brad and one for David. Brad, I’m just trying to get my arms around a run rate for free cash flow. You mentioned the timing of working capital payments and tax payments from the fourth quarter, it sounds like, moving into this year, and clearly your guidance on free cash flow is above plan for this year. But any way to quantify what that timing impact of those are so we can kind of smooth that out and figure out what the recurring rate would be?

Brad Singer

Sure, Anthony. For 2010, the cash taxes were around 400 million. In 2011, as we said, they’ll be 275 to 350, and they may be more towards the low end of that. It all depends on what our domestic production is and how much it qualifies. And so what we have is you had a tax—we had to pay for prior accelerated taxes in 2010 because the law hadn’t been passed; and now that the law has been passed, we get to use the 2010 acceleration and the 2011. So you have a swing of well over $100 million in taxes that would be lower than where we would have been due to the passing of the legislation.

Anthony Diclemente – Barclays Capital

Okay. And is it just that, or is there anything similar to that in terms of working capital, or is it just kind of the 100 million swing?

Brad Singer

It’s at least 100 million. That’s the biggest component of it.

Anthony Diclemente – Barclays Capital

Okay, thanks. And then David, I’m looking at the ratings over the past month or two and it seems like something’s going on at Animal Planet just more recently. So I’m just wondering if there’s any area for concern in terms of the new 2011 ratings at Animal Planet.

David Zaslav

We have a lot of new stuff coming. A lot of our returning series are going to be—we’ll have more originals coming, which we feel good about, and then we’ll have some very good new content. So we’re feeling quite good about Animal Planet.

Anthony Diclemente – Barclays Capital

Okay, thanks. Have a good weekend, guys.

Operator

Your next question comes from the line of Michael Morris representing Davenport. Please proceed.

Michael Morris – Davenport & Company

Thank you. Good morning. Two topics I’m hoping you can cover for me. First, domestically in the past you’ve said that 60 to 70% of your revenue comes from Discovery and TLC. I’m wondering, first, did you see any change in the past year given the strength of your emerging networks; and then second, what kind of audience do you need at ID, Animal Planet, et cetera, Science to reach in order for them to start getting a bigger piece of the pie?

And then secondly internationally, is it safe to assume that you expect or you foresee an acceleration in revenue given the investments that you’re making? And if you look at kind of the components of that business, let’s say kind of a cyclical improvement in the overall environment, a secular improvement, and more penetration of pay TV, and then third, launching new networks or acquisitions, how do you see the mix of what will drive acceleration in the coming years? Thank you.

Brad Singer

Sure. I’ll take the first part and then Dave may comment on some of the others. With regard to the mix of our domestic revenues, even though the emerging networks still grow at—generally the top line grows at generally twice the rate of the more fully distributed networks, because of their sizes we still get 70% or so from the fully distributed networks. So that equation has not changed from our fully distributed networks.

David Zaslav

What we’re hoping is—we’ve had networks that went 50, 60, 65. By getting ID up to 80 million homes this year and having its viewership grow – we were the number 29 network in the fourth quarter; in January, ID was the number 26 network for women. And so we’re focused on the fact that as that network is now reaching big numbers and big audience, that we have an opportunity to try and convert some significant upside over the next few years, and that’s what we’re going to try and do.

Brad Singer

And looking at what the growth drivers are for new investments, it’s primarily in the near term driven by advertising because we start to monetize the success of our investments through ratings and audience, and that’s where you see us, whether it’s in an ID, whether it’s internationally in some of our—it’s Live or TLC or other new investments, that’s where you’ll see it manifest itself. Over time, it may ultimately translate into affiliate fees, but it is really an advertising driven path that you’ll see.

Michael Morris – Davenport & Company

And just on that, can you give some sense of is there an inflection point in audience size when it really gets meaningful? I mean, it seems like Animal Planet is kind of in the middle as far as that’s concerned, given that you speak to Discovery and TLC as being the core drivers. Rough terms, how big does the network have to be to start really making an impact on the ad side?

Brad Singer

Well, Animal Planet makes quite an impact on the ad side. I mean, you’re talking about several hundred million dollars of ad revenue, so this isn’t a—this is not a small network.

David Zaslav

But it does take—you know, once you’ve built an audience, in order to build the CPM it takes some time and the bigger your audience and the bigger your overall (inaudible), the more credibility you have. And that’s why we fought to get Science in almost 70 million homes and to get ID. We think 80 million homes is a big number, so when we have ID in 80 million homes and if it continues to be the number 26, 25, 27 network in America, then we should be moving toward getting more of our fair share of fair value.

Craig Felenstein

Operator, we have time for one last question, please.

Operator

Your final question comes from the line of David Miller representing Caris & Company. Please proceed.

David Miller – Caris & Company

Yeah, hi. Brad, when I look at your EBITDA guidance, it looks really conservative relative to how you guided on revenues. So is the delta there the non-cash comp that you talked about, or does it just have to do with the expense flow-through on the 25 new series slated for the flagship Discovery? If you can flush that out for me, that’d be great. Thank you.

Brad Singer

Sure, David. It’s two parts. One is the biggest driver is what I highlighted, I think, in our last earnings call, which is the amortization of programming is catching up with the last couple years of cash spend in programming. So that’s where you see that come through. The other component is what you just highlighted – we have approximately a $20 million in non-cash comp that as we move to a more traditional stock option RSU base, we deduct that from EBITDA. And those are the two big elements.

We also are making select investments in growth areas, whether it is more in our emerging nets for international. Those expenses are contemplated in that guidance.

David Miller - Caris & Company

Okay, wonderful. Thank you.

Craig Felenstein

Thank you everybody for joining us. If you have any follow-ups, please give us a call. Thanks.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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