Discovery Communications, Inc. (DISCA) Q3 2020 Earnings Call Transcript

Discovery Communications, Inc. (NASDAQ: DISCA) Q3 2020 earnings call dated Nov. 05, 2020

Corporate Participants:

Andrew Slabin — Executive Vice President, Global Investor Strategy

David M. Zaslav — President and Chief Executive Officer

Gunnar Wiedenfels — Chief Financial Officer

Analysts:

Doug Mitchelson — Credit Suisse — Analyst

Rich Greenfield — LightShed Partners — Analyst

Michael Nathanson — MoffettNathanson — Analyst

Jessica Reif Ehrlich — Bank of America — Analyst

Kutgun Maral — RBC Capital Markets — Analyst

Michael Morris — Guggenheim — Analyst

David Joyce — Barclays — Analyst

Steven Cahall — Wells Fargo — Analyst

Ben Swinburne — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Discovery, Inc. Third Quarter 2020 Earnings Call. [Operator Instructions] I would now like the hand the conference over to your speaker today, Mr Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Andrew Slabin — Executive Vice President, Global Investor Strategy

Good morning, everyone. Thank you for joining us for Discovery’s Q3 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. You should have received our earnings release, but if not, please feel free to access it on our website at www.corporate.discovery.com.

On today’s call, we will begin with some opening comments from David and Gunnar and then we will open the call to take questions.

Before we start, I’d 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 Form 10-K for the year ended December 31, 2019 and our subsequent filings made with the U.S. Securities and Exchange Commission.

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

David M. Zaslav — President and Chief Executive Officer

Good morning, everyone, and thank you for joining our Q3 earnings call. I’m pleased to report another very strong quarter and set of operating results, even amidst continued challenges from COVID and market uncertainty. Discovery continues its strong, steady and stable operating performance, despite the secular challenges across the industry.

Discovery remains uniquely constructed to navigate and grow during this time of uncertainty, disruption and accelerated change. Our core strategic advantages differentiate Discovery and give the company a distinct lane in which to attract audiences and drive success. Discovery is the leader across multiple popular family-friendly verticals with universal appeal, anchored by brands and personalities that resonate globally and help people curate.

We own and control the vast majority of our content, almost all of which is unencumbered across all regions and platforms. We’re above the globe. And we are able to monetize our content across one of the broadest global footprints in the industry, across traditional linear ecosystems, including both free-to-air and pay-TV, as well as direct-to-consumer streaming platforms. These advantages, coupled with a flexible, low-cost production model give Discovery a super-efficient programming and content model to drive industry-leading operating margins and free cash flow conversion.

We are a free cash flow machine that supports our ability to invest in strategic, high growth, next-gen opportunities.

Our plans for an aggregated direct-to-consumer offering have come into clear focus, and we look forward to providing a look at our product, roadmap, and go-to-market strategy in early December. We believe you will come away as enthusiastic as we are about where we are going with our global direct-to-consumer streaming strategy.

As you know, the cornerstone of Discovery’s strategy has always been and will continue to be nourishing, entertaining and delighting our fans around the globe with programming anchored by personalities that are recognized, trusted and loved across durable genres and verticals that connect directly with viewers.

Our content and beloved brands are more resonant today than ever before. You see that in that the viewership scale that we’ve achieved globally has increased significantly over the last six plus months. The global pandemic has refocused all of us on what matters most: The people, family and friends in our lives; a reordering of priority and interesting content that is positive, safe and enriching.

Our brands, personalities and content are a magnet for those seeking comfort and familiarity during a time of great unease and uncertainty all over the world. In many respects, we are seeing this play out with our audiences in a meaningful way everywhere around the globe, and our content and genres fits squarely into this moment.

To that point, our share of viewing, both in the U.S. and across most key international markets are up substantially. In the U.S., we have gained the most share among Prime-Time TV viewers, 18 to 49 year-to-date, growing by 130 basis points. And in the third quarter, even during a heavy new cycle, we have grown share by 150 basis points, as viewers 18 to 49 are turning to our Discovery channels. In fact, our top networks, TLC, beat every one of the cable news nets in the third quarter. Internationally, we achieved our fifth consecutive quarter of year-over-year share growth, up 5% in the third quarter, while our audience increased 10% year-over-year, outpacing top level growth — another positive sign for the popularity and durability of our content categories and brands around the world.

In terms of commercial success, behind the firming advertising marketplace around the globe, we have posted healthy sequential improvement again in our advertising revenue growth, which while still negative year over year, is showing demonstrable improvement around the world. We have seen advertising partners resurface around the globe and as measured by our performance in the recent Upfront market here in the U.S., we are very encouraged.

With respect to the Upfront, now that it is wrapped, I’m proud of what our team has accomplished. We were methodical, confident in the popularity of our brands and demand for our categories. We held firm in our assessment about deliverables, and I believe we took another big step forward toward achieving fair value for our reach and engagement, resulting in continued growth in share of wallet. We’ve seen great momentum from what we refer to as our premier product, which is really breaking out. We offer advertisers an unduplicated broadcast equivalent reach across our portfolio at a far more competitive CPM than broadcast, and a very significant premium to even our highest realized CPMs on our individual networks. It’s a win-win.

Gunnar will take you through Q3 and our outlook, but we remain confident that as we return to a more normalized operating environment, Television will continue to demonstrate its value and importance within the media ecosystem, and perhaps even more so now, given the increasing fragmentation in viewing patterns and difficulty in reaching eyeballs.

With regards to distribution, we continue to hold our own, a reflection of the value we bring to the table. In an environment where many of our peers are being priced down aggressively ad or tier. We grew modestly in the U.S., helped by recent renewals, and I’m pleased to note that just recently, we completed mutually beneficial renewals with Mediacom and NCTC. Those deals are on top of the positive deals concluded early in the year with Comcast, Charter and Cox.

And very soon, we look forward to addressing the many homes in the country that currently do not receive our content. The narrative is similar, it’s not a bit more advanced internationally, where we have begun to lean in more intently directly to consumers.

In markets like Norway, Sweden, and the U.K., we have entered into win-win deals with distributors, hybrid partnerships that expand our longstanding linear distribution relationships to also include B2B2C, with additional flexibility to go directly to the consumers ourselves.

Our new direct-to-consumer partnership with Sky in the U.K., exemplifies this approach, where they will offer our U.K.-based aggregated product, Discovery Plus, to their millions of Sky Q customers starting this month.

It’s early days, no doubt. But given our share of market, which in certain regions is north of 30% and secured by highly valued local content, we are optimistic that the path we are on will address the opportunities that are surfacing from evolving consumption patterns around the globe.

We remain well positioned strategically, operationally, and financially, to advance and further refine our direct-to-consumer approach. Our management team has evolved on the strong technology product and content leadership, and we have a definitive path to drive engagement and scale, an unparalleled library of loved brands and personality-driven content, which will support a roster of exclusive and windowed content, all culminating in a platform that is global in focus and local in appeal.

It’s a critical time for our company and our leadership team, and I look forward to sharing more about why we are so enthused for the next chapter of Discovery in early December.

With that, let me turn it over to Gunnar, to take you through the quarter and financial update.

Gunnar Wiedenfels — Chief Financial Officer

Thank you, David, and good morning, everyone. Nine months into the global pandemic and the macroeconomic fallout resulting from it, I am very pleased with our performance and the command and control we have demonstrated over our business despite the uncertainties that exist here in the U.S. and around the globe.

We continue to be laser-focused on efficiency across our global cost footprint and reallocating capital to higher growth next generation initiatives. We are also proud that we have been able to return nearly $230 million to shareholders through our share repurchase plan in the third quarter, for which we noted we would allocate approximately 50% of our free cash flow. This amount represents essentially just that, from the time we reengaged in our program.

Turning to our third quarter results and starting with U.S. Networks. Advertising revenues decreased 8% year-over-year. This was largely a result of COVID-related weakness in demand, as well as continued declines of pay-TV subscribers leading to lower universe estimates. We were, however, helped by healthier scatter CPMs in the quarter, which were up high single digits year-over-year.

Distribution revenues increased 2% year-over-year as affiliate rate growth offset subscriber declines. Subscribers to our core fully distributed networks, which account for nearly 80% of our distribution revenues, declined by 4%, while our total portfolio subscribers declined by 6%. You will note, this is a slightly lower decline than in previous quarters, as we benefited from additional distribution of certain networks as a result of our recent renewals, as well as continued strength from virtual MVPDs, but we remain well distributed across the many operators.

As David noted, we are pleased to have recently completed additional distribution renewals with NCTC and Mediacom.

Now, turning to International Networks, which I will discuss on a constant currency basis. International advertising revenues decreased 9% year-over-year, led primarily by sequentially stronger advertising momentum in many of our key European market. Indeed, markets such as the U.K., Germany, Spain and Finland all finished with positive year-over-year growth for the quarter. Our European region was down high single digits in the third quarter.

In Latin America, while key markets appeared to have bottomed and trends have sequentially improved, the overall regions recovery will likely follow an uneven path. In the Asia-Pacific region, our smallest, was approximately flat year-over-year during the quarter with some markets now generating positive year-over-year advertising growth.

International distribution revenues decreased 4% year-over-year. Like last quarter, Bundesliga was a modest headwind to year-over-year growth. Additionally, our schedule of sporting events is condensed, while the number of events that have been delayed still have not aired, which obviously impact subscription revenues as well as advertising revenue.

Finally, we are seeing a modest pickup in churn from the more economically sensitive segments of the pay-TV ecosystem in Latin America, primarily from subscribers who were delinquent on payments and are no longer being reported by distributors. We expect this to be more COVID-related and a shorter-term disruption.

I’d also like to offer an update on ad sales for the fourth quarter. October has been strong by this year standards, with domestic ad sales roughly flat and international ad sales down just slightly. This may not be a trend we wouldn’t necessarily extrapolate. However, for the full quarter, given, number one, some tailwinds from political advertising in the U.S., in October; and number two, risk from rising COVID case numbers globally and beginning government countermeasures, especially in Europe, which posed risks for back end of the current quarter. That said, we are confident to see sequential improvement in the fourth quarter versus Q3 again.

Total operating expenses for the quarter were up 2% ex-FX. Cost of revenues were up 7% ex-FX, largely due to sports, given the number of postponed events from the first half of the year, like the French Open and the Tour de France, which were rescheduled into the third quarter.

Q4 should look like Q3 from a content ramp perspective, from both linear as well as direct-to-consumer, where we also increased our investment in sports initiatives like Allsvenskan in Sweden, which is primarily available as a premium tier on Dplay.

Furthermore, content production is almost back to normal, with only 10% of our current production still paused, primarily due to travel or local restrictions.

Total SG&A decreased 6% ex-FX, behind reduced marketing and travel and entertainment spend. Year-to-date, total operating expenses are down 2% ex-FX and we remain on-track for total operating expenses to be flat ex-FX for the full year.

Moreover, we continue to expect that total operating expenses for our traditional linear business will be down mid- to- high-single digits year over year, ex-FX; with the savings reinvested in our next generation initiatives.

During the third quarter, we recognize a deferred tax benefit in the U.K., and a benefit from a favorable multiyear state resolution. Year-to-date, our effective book tax rate is 21%. For the full year, we expect an effective tax rate in the low 20% range.

GAAP diluted EPS increased 26% to $0.44 per share, due to the above mentioned tax benefit this quarter versus a tax expense in the prior year quarter, as well as a goodwill and intangible asset impairment charge taken in Q3 2019 related to our Asia-Pacific region. Adjusted EPS on the other hand, decreased 7% to $0.81 per share.

Now, turning to free cash flow. Free cash flow decreased 11% in the third quarter, largely due to COVID-related weakness to revenue and AOIBDA. For the trailing 12-month period at the end of the third quarter free cash flow was $3 billion again, a testament to our free cash flow generation capabilities and our continuing focus on extracting efficiencies, even amid the most tumultuous macroeconomic backdrop in the history of the company.

As a reminder, we face an unusually difficult free cash flow comparison in the fourth quarter, where we converted over 100% of our Q4 AOIBDA to free cash flow last year, and increased cash content spend in the fourth quarter of this year as we returned to more normalized production levels.

Our balance sheet and liquidity profile remains healthy as we ended the quarter with net leverage of 3.3 times, at the midpoint of our target leverage ratio with $1.9 billion of cash on hand and including $250 million of short-term investments and an undrawn $2.5 billion revolver.

Furthermore, during the quarter, we executed a debt exchange which pushed out weighted average debt maturities to roughly 15 years and lowered our cost of debt to 4%.

Finally, FX was an approximate $15 million tailwind on revenues and around $15 million headwind on AOIBDA. For the fourth quarter, we expect foreign exchange impact to revenues to be a $5 million tailwind and a $15 million headwind on AOIBDA.

Lastly, as we head into the final weeks of the year and prepare for 2021, I am encouraged by Discovery’s position in the media landscape even in the face of macroeconomic and secular challenges ahead globally. I believe our solid financial footing will enable us to weather the macroeconomic storm, while supporting our strategic initiatives to meet the secular challenges head on.

We remain very enthused and excited about our strategic pivot and the news that we plan to share with you in the coming weeks.

Now, David and I are happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Doug Mitchelson from Credit Suisse. Your line is open.

Doug Mitchelson — Credit Suisse — Analyst

Thank you so much. Good morning, everyone. David — one for David, one for Gunnar. David, the T-Mobile relaunch of a streaming live TV service was certainly interesting, and you talked on this call about distribution. It’s been relatively broad on all platforms, with the Discovery Networks in the standalone $10 Vibe service, separate from a new sports-focused $40 bundle of channels; can you talk about the strategy there? And then, whether this would be — would allow other distributors to pursue a similar strategy?

And then for Gunnar, I was just hoping for an update — I know you gave the cost investment in digital initiatives, but not the revenue. I was just hoping for an update where 2020 is shaping out in terms of losses on the digital investments and what’s the path forward from here into 2021 and beyond for that? Thank you, both.

David M. Zaslav — President and Chief Executive Officer

Great. Thanks, Doug. Good morning, everyone. We were very surprised with how T-Mobile decided that they were going to bundle our networks, particularly because we have a clear agreement where our networks are required to be carried on all their basic tiers, OTT offerings. So, let’s just characterize it this way, we’re in active discussions with them to quickly resolve that issue. We don’t believe they have a right to do what they’re doing right now, and they know it’s very clear to them and they are focused on it, so.

Doug Mitchelson — Credit Suisse — Analyst

Okay. That’s interesting. Thank you.

Gunnar Wiedenfels — Chief Financial Officer

Okay, Doug. And on revenues and losses from the — from our next generation initiatives; remember, we started the year with the guidance of $1 billion plus in revenue and losses of roughly $600 million. We’ve obviously pulled that. But what I can say is that we have continued to enjoy some revenue growth. All of our numbers include contributions from our direct-to-consumer portfolio. Obviously, not at the level that we originally envisaged, but we’re very pleased with the progress.

We’ve also reduced some of the investments, but continued prioritizing the strategic build-out of the portfolio. So, we still expect a slightly increased investment number here for the year and what we’ll say more later. And also for 2021, it’s a little bit too early, but again, we’re fully committed to the Discovery future in the direct-to-consumer space and we’ll make all efforts to support that.

Doug Mitchelson — Credit Suisse — Analyst

David, if you think you’re going to — David, if you don’t mind me following up, because you did mention that you had a lot of the cable deals done this year. Have you already — sort of, do you have line of sight on partnerships for the launch of your OTT service in the United States? In other words, is the distribution partnership end already ramped up or well enough underway that you have line of sight and visibility? Or is there more to do there before you’re really ready to launch that service?

David M. Zaslav — President and Chief Executive Officer

We’re going to go into real detail, we’re going to do an extensive discussion with full disclosure in early December, which we’re super excited about, where we’ll take you through — in every category, where we’re going, how we’re going, why we think we’re advantaged, how globally we think we can attack it, who is helping us.

We have been — the whole company has been focused on this. So, I’d like to — it’s in early December, we’ll come out with the whole package. I think you’ll like it very much. We’ve had the benefit of being at this for a very long time, direct-to-consumer around the world in different ways. We’ve learned a ton. We see areas where it’s really working and why it’s working. And so, what you’ll see will be the benefit of all of that.

And as you know, as we announced at our last call and as you saw — as we talked about this morning already, we certainly recognize the value of having distributors, multiple distributors supporting. And distributors have recognized the value of having unique content that helps their platforms. And a good example of that is Sky as well as multiple distributors across Europe that we’ve already announced that will be helping us.

Just one other point. We’ve had a really strong year on this issue of how do we get great content to people, engage them in our brands, grow our viewership. And it’s really reflected in the fact that we’ve been able to get all of our affiliate deals done this year here in the U.S. with some of the — some great distributors, large distributors, with very strong pricing, with all of our channels being carried. And it’s a great deal really for both of us, because we’re way over-delivering. They’re selling into our channels. And when you look at the overall package today, the real value here with so many reruns, it’s basically sports, news and us. And who knows what’s going to happen now with political, but news looks like it could potentially go back to normal, in which case there’ll be really a big added benefit, but we’ve been able to get full carriage of all of our channels with big increases and I think that really reflects the great work and the great IP that we have, domestically here in the U.S., and the fact that we are number-one for women, we’re number-two for women, and we have a real broadcast equivalent or higher on many nights than broadcasters, and we’ll talk about that later how we’re advantaging ourselves on that.

Doug Mitchelson — Credit Suisse — Analyst

Thank you, both.

Operator

Thank you. And our next question comes from Rich Greenfield from LightShed Partners. Your line is open.

Rich Greenfield — LightShed Partners — Analyst

Hi. Thanks. A couple of questions. When you think about Discovery strategy that’s coming, I know you’re going to announce it soon, but just conceptually, wondering — especially overseas — how does Eurosport fit in? I mean, are you thinking about having — we’ve seen companies like Disney create sort of a siloed approach where sports, ESPN plus is separate from Disney Plus and Hulu. They kind of have sports separate from everything else. As you go to market, is the thought — when you talk about sort of everything Discovery, does that include what you’re doing in sports overseas or are you thinking about that as a separate product?

And then two, you made a comment in the Q2 release. You talked about how abandonment of some MVPD deals put pressure on subscription revenue as you sort of prepare yourselves for D2C. It sounds like from your commentary that that’s expanding and there’s more markets that we’re playing in beyond the Nordics that were playing into that pressure this quarter. Could you just help us understand sort of where you’re making those decisions to sort of sacrifice short-term affiliate revenue to position yourself better overseas for D2C?

David M. Zaslav — President and Chief Executive Officer

Sure. Thanks, Rich. Well, first, we are the leader in sports in Europe and we are the leader with local IP. And the real advantage that we think we have — and we’ll get into more detail in December — is you have mostly big U.S. services with a little bit of local. And we have dramatic local — local entertainment. We have all of our brands and cable content in language in 200 countries, and all throughout Europe we have local sports. And we do have, as you know, some other local sport like the PGA.

But one of the great things about this company — because we’re in 200 countries — we have the ability, like we did in Denmark to say, “Hey, we might be able to take one step back and two forward; how would it work if we opportunistically take all of our local content, all of our local sports and go to market? And what does it look like? And what is our stack? And who will work with us? And how quickly can we scale?”

And so when we talk to you in December, we’ll have a lot of learnings on what’s worked and what hasn’t. There are — when we can take one step back, and we think that we have the goods to go two steps forward, we’re now basing it on metrics and on knowledge. We think we can do two. We think we really have a free cash flow machine that will continue for a very long period of time to generate real return with great margins. But then we’ll be investing, thoughtfully and knowledgeably above the globe with our — we’ve been holding our global content to go at it, and now we’re going to go at it in a way that we think is quite unique. And I’ve said it for a long time; local content. All of our existing genres, local. And looking at this opportunity to add local sport, and in some cases, it could also be local news. It’s a big differentiator for us.

Everybody else is looking at going above the globe, or even expanding into other countries and they are facing two issues. One — holy cow, I don’t own any of my content outside the U.S., what do I do now? So, do I go buy it back? Do I wait to create it? Now, it’s going to take so much longer to create. So that’s a real a real issue. We don’t have that issue, and we have an extensive library as well as the real local element.

So, I think as you look at all the other players — great players in the marketplace — they are at a huge disadvantage here, and we think we’re at a very significant advantage, and so we’re going to play into that and we’re going to play into it hard.

Rich Greenfield — LightShed Partners — Analyst

Thank you. Really helpful.

Operator

Thank you. Our next question comes from Michael Nathanson from MoffettNathanson. Your line is open.

Michael Nathanson — MoffettNathanson — Analyst

Thanks. I have one for David and one for Gunnar. David, on the Upfront, I know the story was that you guys definitely held out for more pricing. I wonder, can you talk a bit about what you actually achieved on the pricing side? How much inventory would — did you sell versus the past and just — when you look at your premium product in terms of the best pricing versus broadcast, how far is that gap? And do you think it meaningfully closed this Upfront?

And then for Gunnar, I know we’re waiting for Investor Day sometime in December. But just thematically, how do you think about working capital in a more DTC world? Do you think anything changes within the business model, where you maybe will invest more in content and amortize it? But just give me a sense of maybe the impact on cash flow as you build out more D2C products globally. Thanks.

David M. Zaslav — President and Chief Executive Officer

Thanks, Michael. Well, look, I think a number of things worked our way. Our content certainly has a real familiarity and comfort, our characters, our brands. And we’re back to 90% of production. And we were producing content throughout the whole pandemic. So — and we were shooting a lot of it at much lower prices. We found that doing authentic content with Joanna Gaines, or with Dipierro, with Mike Rowe, in their house, that will really work for us.

And what the net-net of it was, when we went into the Upfront, our share was significantly up. We’re the only player now — the Scripps deal and the fact that we’ve really invested in our content significantly, when others haven’t, over the last couple of years, our share is just growing and growing. And right now, what we put together, it’s not just broadcast equivalent, but we’re higher, very often than most of the broadcasters, if not number one on some — on many nights with an unduplicated reach that when an advertiser looks at us, they say, “wow”, for reaching — I mean, they’re better.

And now the broadcasters are — the traditional broadcasters — either haven’t been investing, or they can’t invest now. And so, we have fresh content, and so when we looked at it, we said it really is a win here. We did, I believe we — I know we did better than everyone. But it’s more than that.

Our CPMs have been kicking up, but maybe we get an extra couple of points. We established this Discovery Premiere package. And in those cases, we’re charging dramatically more. So, the broadcasters are 60, 62,64 and we’re in the ’40s, the high ’40s, the mid ’40s, the low ’40s and we go up 50%; but we have better reach with more original content with more engagement, and we found that really the ability to reach women with us and the engagement and the brands and the brand affinity.

So, I think we did great on the Upfront, much better than we’ve ever done. I think we established all the work we’ve done over the last three years of saying, “Here’s what we are. Here’s why we’re more valuable.”

In the long run, there is an argument that we should flip. If the broadcasters are running mostly, rerun content, and we have original content, then why should they be in the 60s and we’d be in the 20s? It’s the package, the core to the package is sports, news and us. And we can provide consistent and reliable original content with high engagement. Why shouldn’t we be in the 60s and they drop?

So, I think we’re really pushing this issue of — and getting a lot of traction. It’s a real win-win. And I think John Steinhoff gets a lot of credit. We’ve been working on this for a couple of years and we’re really breaking through. So — and we see it in scatter. We see it in scatter, a lot of strength, because we have a lot of original content and we have a lot of momentum.

Gunnar Wiedenfels — Chief Financial Officer

Yes. And Michael, on your free cash flow and working capital question. Yes, two things; working capital, I think the direct-to-consumer business in and of itself is a little more beneficial, because you get paid upfront by your consumers directly as opposed to the TV cash cycle; which, as you well know, include some very long payment terms with the traditional business partners. So, that’s a positive.

From a higher level, for the free cash flow, overall, obviously, any start-up business, any growth business has upfront investments, as we’re building scale to monetize the structure that we’re putting in place upfront, so.

But as you know, we’ve been working on this for two years. Very pleased with the progress of the technology, platform. So, that’s an area where we have a bit of a head start.

We’ve also been hiring personnel. We’ve been producing content, as you know. The big swing factor, and the big variable factor for any future expansion is really subscriber acquisition costs, and here we will be willing to get behind anything that’s really successful from a customer lifetime value perspective. And clearly there is a lot of variability in there, and there is also a little bit of — the more successful you are, the more growth potential and growth you’re seeing, the more you’re spending against it.

But again, if you take a step back, I’m very, very confident in this company’s ability to generate free cash flow and investing in our own organic growth is our number one priority. So, we’d be willing to get behind that.

Michael Nathanson — MoffettNathanson — Analyst

All right. Yes. It doesn’t sound like — when other companies pivot, the cash flows can really, really be consumed by the pivot. But it sounds like this is more manageable for you, given the investments you’ve made so far.

Gunnar Wiedenfels — Chief Financial Officer

That plus, again — I mean, we’ve been saying this all along. We’re also just operating in a very efficient model, with our global — truly global footprint, the platform in place and very efficient content draw earners. So yes, we should be better off than others.

David M. Zaslav — President and Chief Executive Officer

And we think, interestingly, that this grand experiment that we’re all unfortunately going through here with the pandemic and operating remotely —- we’ve learned a lot. And we’ve also learned on the content side, how we can produce content for less, how that content can be more engaging and more compelling, how do we produce content — the fact that we’re 90% back in production. And in the overall cost of our company, we think that there’s real opportunity and you started to see — you’ll see it in the numbers you’re going to see it further. It’s revealed real opportunities for us to continue to reduce costs in ways that shouldn’t affect performance or investment in content.

Investment in content in the context of having the amount of original content that we need. We may be able to reduce investment because we can produce for cheaper and use that investment as we pivot to substantial exclusive content for our global platform, direct-to-consumer.

Michael Nathanson — MoffettNathanson — Analyst

All right. Thanks, guys.

Operator

Thank you. Our next question comes from Jessica Reif Ehrlich from Bank of America. Your line is open.

Jessica Reif Ehrlich — Bank of America — Analyst

Thank you. Couple of questions. First, you’ve been really aggressive on the cost side. It’s obvious in these numbers as well. But you’ve seen maybe under the cover of COVID, or just because the industry is transforming — you’ve seen a number of media companies announcing really significant reorganizations over the last couple of months. How do you think about the structure for Discovery? Is there room to continue to — how are you thinking about that?

And then separately, David, you mentioned the Sky direct-to-consumer offer, which we believe is a re-brand of DPlay as Discovery Plus in the U.K. and Ireland and you’ve added a subscription tier. What’s the rationale for rebranding the service and how did you decide on that GBP4.99 price point?

David M. Zaslav — President and Chief Executive Officer

Okay, thanks so much, Jessica. There has been a lot of restructuring. And I think that’s a certain strategy of viewing all IP as one set of IP, IPs IPs IP. We don’t believe that. We have a team that produces food content. We have a team that produces crime content. We have a team that produces natural history content at Discovery. And we think we’ve got the best teams. They understand the brands. They also know the best producers. We have the best producers engaged. We own a lot of the production companies with Mike Freeze; with all three. And we think this this idea of continuing to invest in great creative people, great content and having them understand a lane better than anybody else, the idea of producing HG right now has never been stronger.

Kathleen Finch is one of the best creators I’ve ever worked with, and she’s got a great team. The idea of dismantling that team and saying — okay, let’s just produce shows. I think that may be good for costs and it may work out if you’re just doing broad entertainment and you’re taking pitches. But for us, it’s working for us. And I think it’s going to really drive — continue to drive the two engines that we have. One is our existing platforms.

Outside the U.S., we’re seeing some real strength in the traditional ecosystem, and our share is growing and we’re doing very well and we’re generating massive free cash flow, domestically and internationally. So, we’re not running from that. We think we’re going to be able to get better pricing, as I’ve said. We’re getting more share. If news calms down, we may get a lot more.

And as these other companies decide — you know what, let’s kind of — let’s move away from this platform. I think more and more people are going to what’s really sticky and consumers do see where people are investing. And so, I think we’re going to get a real benefit from that.

Having said that, I think we can save a lot of money. But we’re not going to do it in the area of content and — because it’s going to pay off on both, the great content that we can create. We’re learning a lot about what people want so badly that they’ll pay for it. And how do we create, where do we put content? We’ll make those same decisions, and we’ll talk about that in December.

And we’ve been at that now for a very long time, quietly. But we think great content is what our company is about and owning it globally. That is what Discovery is, and that’s what — we’re a global IP company. And we’re not a distribution company. And so, it’s not a side car for us, it’s what we do for a living.

We’ll talk in December about what we’re doing. You can get a little bit of a hint of it with Sky. We think that a global platform that we can promote on our 10 to 12 channels free-to-air and cable around the world — that we can have a mix of content that’s truly unique, with huge scale is going to pay big benefit for us, and will differentiate us locally and globally. And Sky is just a piece of that strategy and we will explain more of it in December.

Jessica Reif Ehrlich — Bank of America — Analyst

Can I just ask a quick follow-up —

Gunnar Wiedenfels — Chief Financial Officer

The only thing I would add, David is — Jessica, maybe less publicly, but clearly since the closing of the Scripps merger, we have done some pretty significant reorganizations that have helped us achieve the performance that we have and we feel very good about. It’s been — there’s been a lot going on.

Jessica Reif Ehrlich — Bank of America — Analyst

No, you’ve clearly cut costs. That’s not even a question. And then just to follow-up on what David just said. I know everyone is trying to come at it different ways. But we know that you’re going to talk to us in December about your strategy. But on a higher level, can you give any color on how you’re thinking about SVOD versus AVOD or a hybrid strategy?

David M. Zaslav — President and Chief Executive Officer

We’re in the AVOD business here in the U.S. with our GO product. We’ll talk to you a little bit more in December about that. That has gone very, very well for us. We’ve been in the market with advertisers with the Upfront, with that product. We think we’re going to improve that product in many ways significantly, that we’ll have some — that will have some real opportunity for us.

Ultimately, I think that getting — we need to get our content in front of everyone, everywhere in the world. But we will take you through what that balance is and which piece of that we’re going to go at hard. We’ve thought about it a lot. We’ve already been at it a lot, and we’ll give you the detail in the back up in early December.

Jessica Reif Ehrlich — Bank of America — Analyst

Thank you.

Operator

Thank you. And our next question comes from Kutgun Maral from RBC Capital Markets. Your line is open.

Kutgun Maral — RBC Capital Markets — Analyst

Great. Thanks for taking the question. I wanted to ask about U.S. affiliate revenue trends between the pricing visibility you have following your recent renewals, potential upside from the new bundles like the entertainment-only tier on T-Mobile’s T-Vision, and what appears to finally be some relief on the pay-TV sub decline trends. How are you thinking about the sustainability of the recent affiliate revenue strength, looking at the medium term perhaps into 2021?

And just on T-Mobile, I thought your commentary over there was pretty interesting. It sounds like there is some friction with how programming lineups ended shaping up. But one could argue that the entertainment-only tier was a major win for you. So, I’m just trying to first better understand that relationship, and second, see if you think we will see further changes to how linear bundles are structured as you lean into your DTC strategy? Thanks.

David M. Zaslav — President and Chief Executive Officer

Sure. Thanks so much. Well, look, we were encouraged by Tom Rutledge’s performance. I mean, it’s pretty compelling. He’s running a hell of a company and the beneficiary is the country getting more access to broadband and turning the corner on cable subs — Comcast had a very good quarter.

So, it feels like sports was off the platform. We were in the middle of a tough pandemic. People were maybe saying — you know what, let me go buy Netflix, maybe that’s good enough. It’s hard to predict these things. The good news for us is we’re on all platforms and we probably have the best carriage in terms of skinny bundles. Our content has never been stronger. Our scale has never been higher. And we’ve done very well in all of our renewals and getting everything carried. So, what looks like may be a stabilization is very good for us.

On T-Mobile, I think I’ve said enough. In the end, our stuff is carried on the broad platforms and then it is good for us, if in addition to that someone wants to take the great content that we have and offer it in a smaller bundle for less money. That’s good. But not that way.

Kutgun Maral — RBC Capital Markets — Analyst

Understood. Thanks so much.

Operator

Thank you. And our next question comes from Michael Morris from Guggenheim. Your line is open.

Michael Morris — Guggenheim — Analyst

Thank you, guys. Good morning. Two questions from me. First, I’m curious how you’re thinking about the implications of an increasing amount of pure content on these free ad-supported over-the-top services. Do you think that populating those is creating sort of a growing threat to maybe the existing economic model? And as you think about your products going forward, just how do you think of the balance of having your own controlled app environment versus selling your branded content to third parties like Pluto or to the Roku Channel or guys like that?

And then second, maybe just a little bit more specific on the investment in content going forward, particularly into the D2C launch. Are you expecting a meaningful step-up in your cash spend in the 2021 to support the product portfolio? And you talk about the value of the library and how that can support you. Maybe how — is there a way to quantify how much that library, that deep library you have can benefit you in terms of how much content you’re able to serve the consumers? Thanks.

David M. Zaslav — President and Chief Executive Officer

Thanks a lot, Michael. Look, there is a lot of peer. There is a lot of content out there AVOD, SVOD. The good news is that there seems to be a big appetite. One of the challenges is curation. The idea of, hey, here’s more, here is more free. I think in the end, people don’t just want more stuff. They want stuff they know, they want stuff they love, and they need to be able to curate it. I think that Iger has been quite clever. In some ways, it’s a little bit retro. But it’s quite clever with the very successful Disney Plus.

If you look at it, I’m an old cable guy. And when people watch cable, it works because of curation. Everyone has the favourite six channels. There may be 200, but everyone has their favourite six. When you look at Disney, you see those handles, you see Marvel, you see Star Wars, you see Disney family. It’s very clever. They are always together. And it says in a blaring light — we’re not just a whole lot of stuff — those are handles where you can come in and see the stuff you love, and it’s almost like those are the five channels and so it’s quite compelling.

I think the challenge the marketplace is having is there’s just a huge amount of content that’s the same; movies and scripted. And they’re kind of yelling above each other — hey, I got this new series. Well, it’s hard. Here it is what it’s about. Here’s who it’s starring. And so, in some ways, I think it’s very good for us that the marketplace is getting driven with a huge amount of dollars and people are getting more and more used to paying and going to content and consuming it on all platforms. That’s really good for us.

I think what’s even better for us is that all that stuff looks the same. And it’s very expensive to market. You have to explain what the series is about, who’s in it, why they should want to see it, they already have all this other stuff that looks a lot like it.

So, we will take you through it. But we think that our library — we sell very little. We’ve been holding our content for this moment for a long time. And we’re going to go very well with everyone. We’re going to look very different than everyone. And when people see our brands and our characters they going to know very well, who we are and whether they like us, and whether we have real value. And I think there’ll be a lot of comfort in looking at us and not saying — oh, no, another 50,000 hours of content. They look at us and go — I think that’s the stuff I love. And we’ll talk to you more to more about it in December.

Gunnar Wiedenfels — Chief Financial Officer

And Michael, from the perspective of the content cost or investment in development, again, it’s too early for guidance for 2021. What I will say is we are willing to get behind in investment if we see a strong ROI for us, as we have in the past. But that said, to your point, there is a lot of value in our library and not only the library, but also the current content output in our traditional ecosystem that’s already existing — 8,000 hours a year — that obviously, any new product could tap into as well.

So again, as I said earlier, I think our profile will always look better with less cash burn than what others may be able to do.

David M. Zaslav — President and Chief Executive Officer

We’re just – – we just take a look at what we have and we’ve been holding on to it. And this idea that you can sell your content outside the U.S., you could sell some of your best stuff to other players and still do well, you could sell some of your best stuff to three other players and then come out with what’s remaining of that and do well, or have your stuff be non-exclusive, because a lot of other people have it. Those strategies may turn out to be good. You certainly make more near-term money. But we think it’s dilutive and it’s confusing.

Michael Morris — Guggenheim — Analyst

Thank you very much.

Operator

Thank you. Our next question comes from Kannan Venkateshwar from Barclays. Your line is open.

David Joyce — Barclays — Analyst

Thank you. This is David Joyce for Kannan. Your advertising fronts, you were ahead of expectations in the quarter. Could you provide any context on what the digital strategies have done for you there, be it from the Discovery GO apps or from your targeted advertising efforts?

And also wondering what that opportunity set is going forward? Is that opening up the advertiser base for you? And then just one final thing on the Upfront, given the timing shift — and the advertisers tending to seek for a calendar Upfront, is there any structural implications for moving to the calendar Upfront from the broadcast? Thank you.

David M. Zaslav — President and Chief Executive Officer

Thanks, David. We are doing very well on the digital side and our pricing is very good. We’ve been taking those dollars on GO and it’s been strong. We’ll talk to you more in December about how we think we could take more advantage of that.

October, as we said — October was flat. November feels good. And I think unlike maybe many of the others, we did have some political, but it wasn’t in the top five of our advertising. But I think we’ve been doing well because we’re a lot more confident on what we have in the marketplace and the value that we present. And we’ve been doing very well in scatter on pricing. We expect that to continue and we are forming this alliance with many of the advertising agencies that are looking at the restructuring and saying you know — who is still doing a lot of original content that’s dependable on this platform? Where’s the engagement and what’s the pricing? And so, I feel like we’re breaking through on that.

And on the Upfront. The Upfront was very healthy for us. There was some talk about the Upfront really changing dramatically. I think there will be a calendar Upfront, but the Upfront was quite healthy.

David Joyce — Barclays — Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from Steven Cahall from Wells Fargo. Your line is open.

Steven Cahall — Wells Fargo — Analyst

Thanks. First, I just wanted to follow up on Kannan’s question. It sounded like your sub decline improvements were more idiosyncratic than industry, and we’ve certainly seen some MVPD recent reports looking a little better. So just wondering if everything is equal, going ahead we would have even further improvements in your universe sub declines just driven by some of that MVPD improvement?

And then relatedly, we definitely have questions about whether or not you’ve got unusual amount of pricing lift this year with these new renewals. So just wondering if you could comment on whether that’s correct or whether you’ve been kind of recently seeing now is more like a decent run rate for domestic affiliate going forward?

And then just on the DTC side. I know there’s a lot that’s going to come in December. Golf TV is a product that’s already in the market. So, I was wondering if you could give us an update on how Golf TV has performed so far this year? I think you launched it in a couple of new markets. Thank you.

Gunnar Wiedenfels — Chief Financial Officer

Okay. Steve, let me start with the two affiliate questions. Again, I don’t want to speculate about the sub trends. Again, we’re happy to see a slightly better number this quarter. Certainly, hope that that might be the case for a while, but it’s really not in our control. What is in our control is the degree of tariffs that we’re getting. And as David said, in all the recent renewals, we’ve been getting very good results here.

So, there were some talk in the market about potentially getting tiered or losing carriage for networks. None of that has happened. And again, we closed two more deals today and in this quarter that we talked about today, and if you look at our reported numbers, you see that the 2% growth, — you know 4% sub declines on the core net, so you can kind of do the math of what our underlying economics are. And as we’ve said previously, we’re very pleased with the deals that we closed this year that are supportive for this environment.

David M. Zaslav — President and Chief Executive Officer

One point on the — there’s always a balance when you do these deals. We’re pretty well protected, which is our benefit and the distributors’ benefit. We’re carrying on all tiers and we’re carried broadly. And we may, even though we’ve got significant increases on all of our deals, maybe we could have gotten a little bit more. But in the end, from our perspective, getting that full protection, and I think that that was also something that was easy for the distributor to give.

On Golf TV, between golf and cycling and the Eurosport Player, we’ve been gathering data and information. We also have a lot of these other niche products that we’ve been offering. We’ll talk to you in December about what we’ve learned, how we think what we’ve learned, and where we’re really accelerating and where we’re finding it’s a little harder. And the balance with some of these platforms, with AVOD where people come in and could spend a lot of time, and then versus — and then have another tier where they pay on some on some products, like some of the niche products that we have.

And whether niche really in the long term is — with some it might make sense, with others we might be better off putting it all together and having a very unique offering. And we’ll talk to you about what we’ve learned about that, and why we have this aggressive strategy that we’re taking global in — that we’ll talk to you about in December.

Steven Cahall — Wells Fargo — Analyst

Got it. Thank you.

Operator

Thank you and we’ll take our final question from Ben Swinburne from Morgan Stanley. Your line is open.

Ben Swinburne — Morgan Stanley — Analyst

Thank you. Good morning. David, I guess just to wrap up on D2C and again, I know you want to save most of this for December. But one of the things that has clearly been a point of tension in the market with your distributors is launching a product that might compete with what they sell. And I’m just wondering if that, if we’re sort of past that now? I mean, if you look at obviously CBS All Access has been in the market for a while, it’s a pretty direct competitor with CBS network. AMC plus launched recently. Do you think we’re beyond that issue with your distributors and now there is much more alignment?

And secondly, the Scripps deal has been so transformative for the company, I’m sure you’d agree in a variety of ways. And I know there aren’t other Scripps out there, but you generate so much cash flow, have balance sheet capacity, I’m just wondering if you think you’ll be more active in M&A over the next couple of years as you build scale? Because it seems like you’ve got a lot of infrastructure, you have a lot of library content and there aren’t going to be 20 global D2C companies. I’m sure you’d agree. So, if you’re thinking about being more aggressive in that front? Thanks a lot.

David M. Zaslav — President and Chief Executive Officer

Thanks, Ben. Well, I certainly would agree on the Scripps deal. Ken Lowe was brilliant. He’s a real entrepreneur. He built HGTV from nothing. He took food, which was a free service and enhanced it and invested in it and he built a hell of a company with great leadership. We’re very lucky he is still on our Board. He’s been a close friend of mine for 30 years. I’ve learned a ton from him and he continues to lean in with us and it’s one of the big benefits that we have. We’ve become one company.

When we bought it, when we bought Scripps, we were generating $1.4 billion of free cash flow, they were generating $650 million. And we — maybe we were 1:3. And we said we thought we can get to $1 billion. 18 months later, we had over an incremental billion in free cash flow. And it’s been sustained in an aggressive way. Our share has grown dramatically. We’ve taken all the great creative leaders that Ken brought, and we took that content and took it around the world, some channel, some on platforms.

What it showed was in 18 months we went from 4.7 times levered to below 3.5 times. We — if the right asset came up, there is nobody that has more synergy than us. We’re in every country. We — even the fact that we have channels in every country, free-to-air and cable. They’re not just channels now, they’re marketing machines for direct-to-consume, they’re marketing machines for product. And we have infrastructure everywhere. And so what we learned is we can do it, we can do it quick and we can do it while we’re growing our business.

Having said that, we have a hell of a global IP company right now that’s hugely differentiated from everyone in the marketplace. The marketplace is behind schedule in getting — in feeding their IP.

So, where we’ve — we never shut down our IP production. We learn that we can produce for less, more authentically during the pandemic. We’re back up in business and we have a hell of a hand right now. And we’re competing against a lot of players that don’t have local, can’t expand outside the U.S. until they get local or can’t afford to get local. And a lot of what the content that they have looks very much like what everyone else has. And when something comes up, they all bid on the next big item.

And so, we come out with an educated marketplace very, very differentiated and with the amount of free cash flow, our existing business is generating and growing and market share with pricing that looks really pretty compelling on the advertisers side, because globally our share and our performance is being recognized. It looks like we got this free cash flow machine that’s way outperforming globally. And we got all this IP we’ve been holding onto and all this IP we’ve been producing and quietly holding onto, and so I don’t think we need anything.

If something — there’s a lot of people that might say if we come into you, we’d be more diversified, there’d be a huge amount of synergy. But from our perspective, it has to help us grow a lot faster or it has to add real IP that we think is going to further differentiate and further scale us.

So, I think right now, we’ve got a hell of a hand we think, and when — we’ll take you through it in December or when we take it around the globe, we’ll see if we’re right.

Ben Swinburne — Morgan Stanley — Analyst

Thanks, David.

Operator

[Operator Closing Remarks]