The sun never sets on Discovery Communications’ empire. Every day, more than 2.5 billion subscribers in 220 countries and territories can switch on their televisions and watch a program from one of Discovery’s more than 200 television networks, led by the flagship Discovery Channel, TLC, Investigation Discovery, Animal Planet, and Science. In 2013 the Silver Spring, Md.–based pay-TV giant generated revenues of $5.5 billion, a 23% improvement over 2012, and saw its stock soar from $65 to $90 at year-end (it traded at $78 in late May).
Monitoring this impressive performance is CFO Andrew Warren, who came to Discovery two years ago from Liz Claiborne, where he had been finance chief since 2007. Although the 47-year-old Warren played an instrumental role in steering the women’s apparel company though the recession, his more relevant experience for his current position was the 18 years he previously spent at General Electric — in particular his stint as CFO of NBC Universal Television Group, which included such cable properties as CNBC, MSNBC, and Bravo. (Comcast now owns the group.) The head of the group at the time?
David Zaslav, now president and CEO of Discovery.
“It’s been a dream job for me,” says Warren of reuniting with Zaslav at Discovery. In addition to core financial functions, the CFO has a number of operating responsibilities on his plate. They include oversight of the company’s media technology, production and operations division (“the technical facilities around content creation”) and representing Discovery in its three U.S. joint ventures, including OWN: Oprah Winfrey Network.
Recently, Warren talked to CFO about Discovery’s cash-rich business model and its outlook for growth, which increasingly lies overseas: revenues for the company’s international networks grew 51% last year, compared with 7% domestically.
What makes pay TV such a good business to be in?
Pay TV is an enviable industry for several reasons. One, it’s a dual-revenue-stream business: you get subscription fees from distributors and advertising dollars from advertisers. Around the globe, we’re 50% sub-fee-driven and 50% ad-sales-driven.
A second reason is the barriers to entry. Pay TV is an industry that is hard to penetrate unless you have an established brand, an established infrastructure, and “shelf space” on cable, telco, and satellite systems.
Another reason is that pay TV is still growing. The U.S. is largely fully penetrated, but in many of our big global markets there’s a huge amount of organic pay-TV growth. In Brazil, 34% of households subscribe to pay TV. In Italy it’s 35%, Australia 30%. These are all tremendous opportunities for us, and we have anywhere from 6 to 12 channels in those markets.
In fact, last year 45% of Discovery’s revenues came from its international networks, and soon most of it will come from overseas.
That’s right. The U.S. is a healthy market; we have 12% audience share of the pay-TV universe. But the real differentiator for us is our international business.
What’s the growth outlook for ad sales?
We continue to see nice increases in the U.S., from mid-to-high-single-digit increases, even double-digit increases in some quarters. We have a very balanced portfolio among demographics and among different profiles. For example, we have top channels for men with Discovery and Animal Planet. We have top channels for women with TLC and Investigation Discovery. So we’re able to go to different advertisers and target their audiences more directly.
How do you woo teenagers and young adults — the Millennials? They seem to spend more time with phones and PCs than with TV.
That’s a good question, and it’s one that we think about a lot. The good news is that people are consuming content more than ever. We’re platform agnostic, and we have a deep offering for the Millennials. We have 90 YouTube channels and more than 300 million monthly streams across our global digital portfolio. We believe that more advertising dollars will go toward those channels, although to date advertisers are still focused on the traditional linear TV path.
Recently Discovery acquired a majority stake in Eurosport, which David Zaslav says will be “the ESPN of Europe.” What is the rationale behind the deal?
First, Eurosport is a top-10 channel for men in 54 countries. We’re in those same countries with top-10 channels for men like Discovery and Animal Planet, so the synergies are dynamic and real.
The second rationale is that TF1 [the French media group], which had owned Eurosport for many years and is now a minority joint-venture partner of ours, managed it as a pan-European service. They didn’t have local ad sales, and they didn’t have content specifically driven toward particular markets. Because we have offices, salespeople, content people, and distribution expertise in those 54 markets, we’re going to take a much more localized approach to that content.
Discovery generates a lot of free cash flow — $1.17 billion in 2013. What accounts for that?
We are a very cash-flow-rich company. We have a strong organic-growth story. The top line is very strong, thanks to the fact that we can produce content and quickly share it across all our platforms. We can repurpose it into 45 languages. Take Gold Rush, which is produced mostly in English. We can air that same program in the local language across our 220 countries and territories. Think about the margin profile of a show that you produce once and air across so many countries within a very short window of time.
For that to work, your content must have wide appeal.
Nonfiction content by and large plays well across multiple cultures and countries. Many of our programs feel very local to the countries in which we’re airing them. If you’re in Italy or Russia or Japan and you’re watching a science program or a natural history program, or a show about curiosity — which is so much of what our DNA is about — it feels local. And that’s a huge asset for us. While we have a global footprint and we utilize content globally across platforms, we have a very local aesthetic. It’s because of that multiplicative use of content that we have by far the highest margins in the industry.
What do you do with all the cash?
We focus on three things. The number-one allocation for cash is for investing in organic growth. The second allocation is for strategic, bolt-on acquisitions, such as Eurosport. Whatever capital is left — and fortunately, we have a lot — we believe the best allocation is to return to shareholders through our share repurchase program. So we’ve been actively buying our stock.
Last year Discovery repurchased $1.3 billion worth of its stock.
That’s right, and the year before that was $1.4 billion. And we can see doing a significant amount of repurchases this year as well. As long as our model stays true — good organic revenue growth, good margin expansion, good free cash flow — our free-cash-flow-per-share growth will exceed our peer group’s, and we’ll get rewarded for it through share price.
As CFO, how do you manage your time?
Every quarter my assistant and I look back and review my time allocation. There are four buckets that I keep track of. I spend about 40% of my time on operations — looking at sales, costs, industry trends, the performance of our channels and networks. I spend 20% on strategy — the forest-and-the-trees kind of things. That’s the tax strategy, the capital structure strategy, acquisitions, divestitures. Are we doing all the things we should be doing to maximize the value of the company three to five years from now?
I spend another 20% of my time on people — assessing my team, communicating in town hall meetings, just spending a lot of time on ensuring clarity and direction and focus. Finally, I spend 20% of my time on communication — with investors, the board, employees. In the role I’m in, it’s impossible to overcommunicate.
Last question: What’s your favorite Discovery channel?
Definitely the Science Channel.