DISCA

Discovery Communications, Inc. (DISCA)

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Discovery Communications, Inc (DISCA)

Morgan Stanley Technology, Media & Telecom Conference

February 25, 2013 11:45 am ET

Executives

Andrew C. Warren - Chief Financial Officer and Senior Executive Vice President

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

Presentation

Benjamin Swinburne - Morgan Stanley, Research Division

Can you hear me? Yes. All right. Good morning, everybody. My name is Ben Swinburne, Morgan Stanley's media analyst. And let me first get rid of my legal obligation, please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website or at the registration desk. And we're really excited to kick off the media portion of the conference with Andy Warren, Senior Executive Vice President and CFO of Discovery. Andy joined Discovery in March 2012 from Liz Claiborne, where he was CFO since 2007. And in his first year in the company, Andy led the $1.7 billion acquisition of SBS Nordic, which is the largest acquisition in Discovery's history. Andy, thanks for being here.

Andrew C. Warren

Of course. Thanks. It's good to be here.

Question-and-Answer Session

Benjamin Swinburne - Morgan Stanley, Research Division

So with a year under your belt, maybe you could reflect on your experience at Discovery so far. And looking forward, what are the big kind of growth initiatives you and David and the team are focused on?

Andrew C. Warren

Sure. Well, good morning, everyone. Really, it's been a great first year. I mean, I love the company, I love the culture, it's been a great year so far. Although I'd say as far as early impressions or takeaways, first of all, our Board is extremely long-term focused. And it helps the fact that they are some of our largest shareholders, but they do have a very long view on creating shareholder value, and it's one of the reasons why we take the long view we do on content. That's why we're able to build out international platforms and infrastructure we have. It's why we're able to launch channels like ID and Destination America where maybe there's a short-term margin compression, but you really get a chance to take a long view on asset creation and build some great channels like ID is today. So clearly, the Board's long-term view is very helpful. Secondly, I obviously got to know the management team extremely well, and the experience and gravitas of that team is off the charts. You look at John Hendricks, who founded the company, is still very involved. David Zaslav who's been involved for over 30 years in the cable space, fabulous leader. Mark Hollinger, who runs international business, no one knows, I think, international as well as Mark does, such granularity across all of the markets. And you look at Joe, Head of Sales, he's led sales organizations for over 20 years. You look at Bill leading our affiliate team, he's been doing this for Discovery for 25 years, he just has an incredible understanding of that marketplace. And from the content side, when you look at Henry Schleiff and Eileen O'Neill and Marjorie Kaplan, I mean, these people have been in the content-producing space for, in some cases, over 30 years. So the experience and the knowledge and the passion that these people have for Discovery is pretty impressive. As far as the strategy, Ben, I mean it really comes down to -- look, our strategy is to be the #1 pay-TV platform company in the world and the best content company in the world. We believe in the pay-TV model. We are very focused on really 3 things: driving global revenue growth; expanding our margins; and really significantly increasing our free cash flow per share. Those are our biggest metrics that we focus on.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. Usually, you guys mention nonfiction in that description. Did you drop that on purpose?

Andrew C. Warren

No. No. Look, it's still very much our core. I mean it's still very much the core of who we are and who we'll always be. But I tell you, we have broadened our content offering, and it's an important part of reaching a broad audience, it definitely gets us exposure to a broader ad base, but clearly, nonfiction is still very much our core.

Benjamin Swinburne - Morgan Stanley, Research Division

That's a good segue to SBS. Doubling down in Europe right now, you probably surprised a lot of people. Why do you guys think it was a good deal to do? I guess it hasn't closed officially yet. But why are those assets attractive to you? And how much does scale help you in that market? And maybe talk a little bit about the synergies that you guys expect.

Andrew C. Warren

Well before I get into SBS specifically, let me talk about it from a finance point of view, how I look at every deal that we do. Every acquisition we do, there are 3 critical criteria that they all have to meet. First of all, they have to be EPS and free cash flow per share accretive day one. Second of all, we have to buy them in a multiple that's less than our trading multiple, and ideally below 10. And third, and most importantly, the un-levered IRR, in every acquisition we do, has to be at least in the low teens. And so every deal we've done has achieved those 3, the only one that didn't is Revision3, but that's a very different kind of asset that we've bought, but every other deal we've done has met those 3 criterion. But as far as assets specifically, look, it did a -- it is a leader in the Nordic space. It has over 30% share in Norway, it has over 20% share in Sweden and Denmark and almost 20% share in Finland. The combination of our 2 assets and our 2 companies, great leadership teams, great ad sales, there clearly are some good costs, and even tax synergies, that we have with that asset that we're working through now. But it would absolutely be accretive day one, and it will be a big piece of our growth story.

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