Q4 2016 Real-Time Call Brief

Highlights

Eurosport helped us grow international affiliate revenues in 2016 by 10%.

Our local, premium, and exclusive sports rights drove Eurosport viewership up 23% in the fourth quarter.

With Eurosportt leading the charge for our diversified and differentiated offering of about 10 channels per country, we expect our international affiliate growth to accelerate by at least a couple of hundred basis points in 2017 adding over $215 million in affiliate revenues ex-FX.

Early results in testing various customer packages are promising including in the UK, where we've seen a 150% increase in subscriber in the market.

Today GO is available in more than 80% of US Paytv households.

So over a 150 million people, and we have expanded our content portfolio to now showcase over 5,000 episodes.

We are finding that GO is a great vehicle for reaching the younger viewers, with about 40% of our viewers ages 18 to 34 averaging 1 hour length of tune-in.

In the first quarter, our GO apps will contribute over a point of US advertising growth to the bottom line and its contribution is trending to increase to 2% by the end of the year.

Our international portfolio recorded it's highest international delivery yet with year-over-year audience increase of 3%.

In the fourth quarter we wrote down over $20 million of content that wasn't working.

Looking beyond SPSS's income statement impact, our initial $1.7 billion investment four years ago, has already delivered over $0.5 billion in free cash flow.

On 2015 year end call a year ago we issued full year 2016 guidance of constant currency adjusted EPS and free cash flow both up low double digits to low teens.

We also said that our 2016 effective tax rate would be below 30% and that we would have full year For full year 2016, reported revenues were up 2% and adjusted EBITDA was up 1%.

Excluding currency, revenues were up 4% and adjusted EBITDA was up 5% and total company margins expanded to 37%.

On an organic basis, so excluding the impact of foreign currency in last year's SBS Radio sale, total company revenues and adjusted EBITDA both grew 5%.

Full year net income available to Discovery Communications of $1.194 billion was up 15% versus last year.

Our full year effective tax rate was reduced by 600 basis points to 27%.

Full year reported EPS was up 24% to $1.96, and adjusted EPS which adjusts for the impact from acquisition related non-cash amortization of intangible assets was up 21% to $2.13.

Adjusted EPS excluding FX the third quarter landscape write down and the fourth quarter Group 9 gain was up 20%.

For the full year, free cash flow increased 9% to $1.29 billion.

Excluding the impact of currency, our full year our full year free cash flow was up fully 21%.

Reported total company revenues were up 2% and reported adjusted EBITDA was up 1%.

Excluding the impact of currency, revenues were up 4% and adjusted EBITDA was up 3%.

Fourth quarter US affiliate revenues were up 6%.

Excluding a few small one-time items, 4Q growth would have been 7%.

Total portfolio of subs in the fourth quarter declined by just under 3% year-over-year.

Fourth quarter US advertising revenues were 1%.

After a 100 basis point negative impact from deconsolidating seeker and source fed post the December Group 9 transaction, our first quarter domestic ad revenues are expected to be at least flat year-over-year.

Fourth quarter adjusted EBITDA was up an impressive 9% as operating expenses were actually down 3%.

For the full year 2016, total US revenues increased 5% led by 7% distribution growth and 2% advertising growth.

Full year costs were flat leading to an 8% adjusted EBITDA growth.

Our relentless focus on controlling costs drove domestic margins to 59%, 200 basis points higher in 2015.

International ended the year with a solid quarter of double digit organic distribution growth and improved organic advertising growth leading to 5% total revenue growth for the fourth quarter.

Fourth quarter advertising growth of 3% was driven by growth in all regions excluding Asia-Pac our smallest region which declined partially due to demonetization in India.

Operating costs were 12% in the fourth quarter leading to a 9% decline in adjusted EBITDA.

For the full year, revenues were up 6% with 3% advertising growth and 10% distribution growth.

Costs were up 9% with a 12% increase in cost of revenues primarily due to increase sports content and production cost, as well as the higher fourth quarter impairment charges while SG&A was up 4% leading to a 3% decline in adjusted OIBDA.

Excluding both impairment charges adjusted OIBDA for the full year was down 1%.

We expect our 2017 distribution revenue growth to grow at least $215 million pre-FX or 12% to 13%.

In the fourth quarter we repurchased $250 million of common and preferred stock after investing $100 million in the Group 9 transaction.

During 2016, we bought back a total of $1.37 billion worth of common and preferred shares.

We have now repurchased over $8 billion of our stock reducing our outstanding share count by 36%.

In the fourth quarter our initial $63 million solar investment improved our book tax rate by 100 basis points and we also recognized $24 billion book equity loss due to solar asset depreciation.

For 2017, we have already committed to invest an additional $240 million and will likely invest another $100 million for a total solar investment of $340 million in 2017.

Assuming we invest this full $340 million in 2017, we would expect a book equity loss of approximately $200 million.

We expect our 2017 effective book tax rate to be at or below 20% and our cash tax rate to be in the high 20% range, so over 700 basis points and 300 basis points improvements from our 2016 tax rates respectively.

In the first quarter 2017, we've already invested approximately $100 million in additional solar investments.

We stand by our unwavering commitment to our investment grade debt rating and keeping our gross leverage below 3.4 times.

On the cost side, we expect our global organic cost of revenues to be at to be up in the high single to low double digit range driven by sports and direct to consumer investments.

We also expect our global organic SG&A to be flat to up only low single-digits resulting from predominately completed 2016 proactive cost reduction actions.

Importantly, this year we expect constant currency adjusted EPS to grow strongly in the low to mid teen range and constant currency free cash flow to grow atleast low double digits.

versus '16 revenues by $30 million to $40 million, adjusted EBITDA by only $0 million to $10 million, and adjusted EPS by $0.10 to $0.12, given the below the line FX gains in 2016.

We raised our three year growth guidance last year and are confirming today, that we still expect our constant currency adjusted EPS and constant currency free cash flow CAGRs for 2015 through '18, to both grow at least low teens or better.