Andrew Slabin:

Good morning and thank you for joining us for Warner Bros. Discovery's Q1 Earnings Call. Joining me today is David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette; CEO and President, Global Streaming and Games.

David Zaslav:

Hello, everyone, and thank you for joining us. As we kicked off the new year, our focus was simple

While we still have lots to do, I am pleased to say the content lineup on Max over the next 12 to 18 months is one of the strongest ever. March was particularly strong with March Madness and Quiet on the Set, a huge hit coming out of our ID networks. And in Q2, we'll benefit from the third season of critically acclaimed series, Hacks; the streaming premiere of Iron Claw and Dune:

Part Two; Champions League in LatAm; and the June 16 premiere of season 2 of House of the Dragon, which was one of the most successful series in terms of engagement and subscriber acquisition, just to name a few.

Bryan Kraft:

I was wondering if you could share any additional details about the bundling relationship with Disney+ and Hulu, for example, pricing, how much marketing will be behind it and how the 2 companies are coordinating and funding the marketing activities.

David Zaslav:

Thanks so much, Bryan. The bundle with Netflix is doing much better than expected with Verizon. And so I think it's another example where there's more strength together, and it's really driven by the need for a change in the consumer experience. We see it in all of our studies and then even on a practical basis talking to consumers. And so it's just much more efficient.

Operator:

We'll take our next question from Vijay Jayant with Evercore ISI.

Jean-Briac Perrette:

Yes. Just the only thing I'd add is, look, I think what happened in the 2010s is the industry went down a very dangerous financial path of trying to invest in every type of content in every genre to try and be something for everyone. And at the end of the day, we know where that led us to. We're now getting back to all being great at what we do and swim in the lanes that we were great at. Disney, obviously, is incomparable and world leader in kids and family. We are world leaders in premium dramas, scripted drama, comedy, nonfiction verticals. And we can get back to investing and prioritizing our lanes and our key content, they can do theirs.

David Zaslav:

It does feel like this is a moment in terms of what the next year or 2 years will bring. I said a while back that this is a generational disruption. I went through a generation -- a disruption not quite as big as this, but when my career started, when the cable business was getting started, that was a real disruption.

Operator:

We'll take our next question from Jessica Reif Ehrlich with BoA Securities.

Gunnar Wiedenfels:

Yes. I mean, look, for the Upfront, I think it's a little early. We definitely hope to continue some of the momentum that we've seen last year. I would also say that we're operating in a much more constructive environment this year than we did last year. So hopefully, that will be supportive.

David Joyce:

Following on to the Upfront and advertising question. You obviously have a long -- a strong relationship with the advertisers and have been on the forefront of ad tech. I'm just wondering how you're able to match up your analytics and data and targeted advertising on the linear networks with the offerings that the various digital platforms are doing. Just wondering when that might be showing through or is it starting to show through as some of this modest sequential improvement.

Operator:

We'll take our next question from Kannan Venkateshwar with Barclays.

Jean-Briac Perrette:

Thanks, Kannan. On your first question, look, we think this proposition of Disney+, Hulu and Max is incredibly robust and compelling. You've got truly -- when we think about a lot of what's happened, as I said earlier, around people trying to figure out whether every individual company could invest sufficiently to deliver something great for everyone in the household, the reality is we've, I think, all learned somewhat painfully that the expense and frankly the excess of content from a consumer standpoint was way too much.

Gunnar Wiedenfels:

Yes. Look, I mean, in terms of replacing linear ad sales, again, one important point that I want to reiterate, and we've made this a couple of times before, I think it's too simplistic to just look at, okay, we're doing, whatever, $7 billion of linear advertising today and that's going to transition elsewhere because the viewership is transitioning elsewhere. I do believe that we're going to see a very, very long period of coexistence. And feedback we're getting from the marketplace and the success we're seeing in our ad sales go-to-market, I think, supports that. So those environments are going to coexist.

Gunnar Wiedenfels:

And if you look at the combined company, as we said in our prepared remarks, I mean, the combined company advertising trend is still down, obviously, with what we're seeing in linear. But it's gone from down 10% to down 7% and that's really driven by some of that support we're seeing in the streaming world.

Richard Greenfield:

I wanted to follow up on JV. You mentioned the buy flows and sort of how this will work from a both of you adding it into those buy flows. But how about the marketing? Like when you walk through -- I'm sure everyone who's on the call has walked through JFK, you've seen the massive Disney-Hulu advertising. Like are they going to be marketing House of Dragon this summer when this launches?

David Zaslav:

And look, we're always looking for good content. We structured a deal a while back for South Park, which has been a great product for us. When NASCAR came available for the summer, we bought some NASCAR. We have hockey, which we've done and -- which we added in the last few years, we're having a lot of success with. So any content company that we're -- we bought a movie output deal with A24.

Operator:

And we will take our final question from Steven Cahall with Wells Fargo.

Gunnar Wiedenfels:

And then, Steve, on the continuous improvement mindset, again, it's -- I think it's important to take a step back. The large part of this company and maybe the entire industry just was never very focused on financial discipline. We have dramatically changed that. We have a completely different mindset across the entire management team now. And that starts from the creatives who know that the creative stories need to be great, but we're also running a business. And we have so many different processes in place now and some of those pay dividends over time.

David Zaslav:

And one company really -- you really see it in the ability to market globally. You saw it with Barbie, Wonka, with dune

Gunnar Wiedenfels:

And even in our growth business under JB and Casey, we're still focused on this. There's a difference between an investment and an expense. And there is -- it's not a coincidence that we're leading in terms of profitability while we're getting ready to significantly accelerate our growth over the next couple of years.

Andrew Slabin:

Good morning and thank you for joining us for Warner Bros. Discovery's Q4 earnings call. Joining me today is David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette, CEO and President, Global Streaming and Games. Today's presentation will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may include comments regarding the company's future business plans, prospects and financial performance and involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on factors that could affect these expectations, please see the company's filings with the U.S. Securities and Exchange Commission, including but not limited to the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. And with that, I'd like to turn the call over to David.

Gunnar Wiedenfels:

Thank you, David, and thank you everyone for joining us this morning. 2023 was indeed a year marked by the accomplishment of several key objectives, and I'm very pleased with the effort across the organization to evolve our company as our industry continues to change. We come into 2024 well-positioned and once again with an ambitious agenda to further enhance our financial and strategic profile and to drive meaningful long-term shareholder value. Though we grew EBITDA 12% for the year on a pro forma basis, more than $1 billion year-over-year, the enormous financial benefits of our many important and successful transformative efforts have been somewhat mitigated by sustained headwinds across the industry. Yet we made strong progress against this backdrop this year, and I'd like to highlight a few notable accomplishments. First, our post-merger integration is substantively complete as of the end of 2023. We have now achieved total combined merger and transformation savings of $4 billion, not including the significant savings realized on content as well. As David has laid out before, while we talked about synergies, we're really applying a fundamentally different management approach to the combined company, data-driven and rational, with shareholder value at the center. There are substantial improvement opportunities left for us to capture, particularly in areas such as enterprise systems, production flow, global centers of excellence to name a few, and we expect to see this reflected in our near and long-term free cash flow generation. This is an entire organization buying into and operating with a one-team, one-company mindset. Second, our streaming team has made the turn. The D2C segment generated approximately $100 million of positive EBITDA, a $2.2 billion improvement year-over-year on a pro forma basis, well ahead of our targets. This was accomplished with a tremendous level of rigor and discipline across every aspect of the business, from programming to marketing to technology. And as expected, we've begun to see an inflection in subscriber-related revenues, both distribution and advertising, which accelerated to over 6% during the second half of the year versus very modest growth in the first, helped by price increases, growth in the ultimate tier, and scaling of the ad-lite subscriber base. 2024 will indeed be a pivotal year for Max. Relaunches and rebranding in existing Latin American and European markets over the next few months will be critical to bringing consumers an improved product experience and a more robust content offering, which will put us on better competitive footing. We will continue to take a disciplined approach to investing in subscriber growth, mindful of lifetime value to subscriber acquisition cost ratios as we proceed into this next phase. D2C advertising growth should layer in nicely throughout the year and the business is gaining momentum as it scales. With a more high-profile slate of shows from HBO scheduled for release throughout the year as compared to the second half of 2023, we're very well positioned to offer a greater share of highly coveted premium streaming inventory. Third, you have heard us talk about the free cash flow opportunity since we first announced the deal. In 2023, we generated $6.2 billion of free cash flow, a 60% conversion of our EBITDA to free cash flow. The impact of the strikes contributed roughly $1 billion to free cash flow while negatively impacting our EBITDA by a few hundred million dollars. We made great strides in realizing capital efficiencies throughout the year, and it was particularly evident in Q4 with over $3.3 billion of free cash flow generated this quarter alone. I am very pleased with the momentum here as the focus of the entire team continues to shift towards a deeper understanding of capital returns and shareholder value. We have laid a very solid foundation in 2023, and I expect 2024 to be another strong free cash flow year. Finally, all of this has helped support $5.4 billion of debt paydown during the year, including all of our more expensive variable rate term loans, enabling us to finish 2023 with less than $40 billion of net debt and resulting in net leverage of 3.9 times EBITDA, in line with our guidance from last February, despite all the headwinds mentioned earlier. I am very pleased and comfortable with our current capital structure, given the tremendous progress we have made. The entirety of our outstanding debt is now fixed with an average cost of 4.6% and an average duration of 15 years. Importantly, we have only very manageable amounts of debt coming due over the next three years, $1.8 billion this year; $3.1 billion next year, and $2.3 billion in 2026, providing us with real flexibility in how exactly we delever the company. We remain committed to our long-term gross leverage target of 2.5 times to 3 times, and while we do not expect to hit that target by the end of this year, as we noted on our last earnings call, we do expect to continue delevering in 2024 as we stay focused on debt repayment with our free cash flows and any proceeds from non-core asset sales like the All3Media sale announced last week. Turning briefly to the quarter, which I will discuss on a constant currency basis, I'd like to call out a few items and offer some additional puts and takes to consider for each of the segments. Starting with Studios. The primary callouts were, number one, the impact of the strikes, as I noted, which halted the production and delivery of TV content during the fourth quarter, which also informed some of our decisions about retaining or licensing content externally in the second half of the year. And two, what can best be characterized as an inconsistent performance of a theatrical slate. Wonka, the co-financing partnership, has had great success at the global box office and performed well above expectations, while Aquaman and the Lost Kingdom and The Color Purple unfortunately did not. This was evident in our lower-than-expected financial results across revenue and EBITDA. A couple of items to consider for the Studios segment during the coming quarter. We are lapping the release of Hogwarts Legacy in February last year, which saw the largest portion of its very positive financial impact in the first quarter. This year, Suicide Squad, one of our key video game releases in 2024, has fallen short of our expectations since its release earlier in the quarter, setting our games business up for a tough year-over-year comp in Q1. On the film side, Q1 will be burdened with the marketing campaigns for Dune Two and Godzilla vs. Kong, which opens at the very end of the quarter. Turning to Networks, revenues decreased 8% as advertising decreased 14% due to continuing softness in the US linear advertising market. Note, the disposition of the AT&T SportsNet negatively impacted advertising revenues by approximately 100 basis points during the quarter. While still not back to where we'd like it to be, we are seeing a nice improvement thus far in Q1. Domestic ad sales are pacing meaningfully better quarter to date as we are beginning to capture the benefits of our strong upfront deal struck last year. International ad sales, which accounts for over 20% of total network ad sales, continue to be firmer overall, particularly in EMEA, which represents over three quarters of international ad revenues, and where we saw a modest growth year-over-year during the fourth quarter. Like the US, we're seeing acceleration through the beginning of the first quarter so far in EMEA overall, while we continue to face challenging market environment in LatAm as ad dollars more steadily migrate to streaming, which ultimately presents a nice opportunity for Max as we relaunch in these markets. Network distribution revenues were effectively flat in the quarter after adjusting for the 400 basis points headwinds from exiting the AT&T SportsNet and transferring the TNT Sports Chile business to the D2C segment. On a reported basis, revenue decreased 3% as US pay-TV subscriber declines outpaced US affiliate rate increases, while inflationary impacts supported by inflation-linked pricing agreements in Argentina also benefited results. Overall, Networks EBITDA decreased 11% as the decline in high-margin advertising revenues was only partially offset by a 3% decrease in operating expenses, excluding the AT&T SportsNet's and TNT Sports Chile impact. Turning now to D2C, we finished the quarter with nearly 98 million subscribers, a modest sequential increase after accounting for the full consolidation following our acquisition of the outstanding shares of BluTV as well as transferring our TNT Sports Chile subs to the D2C segment as part of our premium sports streaming strategy. International remains the most important driver of our D2C subscriber growth with over 1 million subscribers gained in Q4. This more than offset domestic declines, where we continue to feel the impact of the partly strike-driven lack of fresh tent-pole content through the second half of the year. And as discussed before, remember that linear wholesale losses continue to mask underlying retail D2C traction. Content revenue in the segment declined 30% due to the intrayear timing of third-party licensing deals that we laid out in detail earlier in the year. Keep this in mind as we comp this in Q2 of 2024. Among the D2C subscriber-related revenues, which were up over 6% in the quarter, distribution revenues increased 4% and benefited from price increases in the US and certain international markets, as well as the Amazon Prime partnership in the US, which we lapped in December. Advertising revenues accelerated nicely versus Q3 to over 50%, helped by the 20230-2024 upfront deals, higher engagement on Max and ad-lite subscriber growth. We currently see the pace of D2C advertising revenue accelerating off this pace in Q1 and expect this to be an impactful segment driver for 2024 overall. With regional relaunches and key new market launches heavily weighted towards the first half of the year, we expect D2C EBITDA to be modestly negative in the first half and then profitable again in the second half. Net-net, we currently expect the D2C segment to be profitable for the year as we continue to pivot our focus on profitable top line growth. We remain focused on our target of $1 billion in D2C segment EBITDA in 2025, and 2024 will certainly lay important foundations for achieving this goal. Turning to our outlook for Q1 free cash flow, we're off to an outstanding start. Remember, Q1 is traditionally our seasonally weakest quarter, yet we see continued strong momentum so far and expect a very meaningful improvement year-over-year versus the negative $930 million we incurred last year. We continue to capture our cash opportunities, and I believe we have many more bites at the apple for years to come. Let me mention additional puts and takes to consider as you think about free cash flow for the year. Number one; the net cash benefit from the strikes, which will reverse this year as content production resumes to normalized levels, will naturally be a negative to free cash flow. We incurred roughly $1 billion in integration related cash costs, a little lower than what we had anticipated for 2023 due to the timing of certain initiatives. As we continue to execute on our transformation journey, we will likely incur some additional cash restructuring costs, but we expect this to be at a significantly lower level. Number three, the Olympics will be a drag to free cash flow this year, given its working capital dynamic. Number four, interest expense will certainly be lower in 2024 as we continue to delever and CapEx will likely be slightly lower as well. And then finally, of course, EBITDA will be the biggest determinant of free cash flow. Before I turn it back for Q&A, I'd like to finish with a final remark on the magnitude of change that's taken place at WBD. It really is night and day versus where we started. Of course, we still have additional work to do and more opportunity to capture, but the heavy lifting we've done helps pave the way for ongoing transformation and our ability to embrace the three pillars of our strategy, which reflect our strong commitment to quality storytelling, achieving maximum value through broad distribution and monetization, and operating professionally with a one company mindset. We are significantly closer to our longer-term leverage targets with more than $12 billion of debt paid down in less than two years. Certainly, having a more flexible financial profile doesn't insulate us, or anyone else for that matter, from having creative wins and losses, but it most certainly will help us take the necessary steps required to further achieve our growth objectives and to more intently focus on driving shareholder value. Now, David, JB and I will take your questions.

Kutgun Maral:

Good morning. Thanks. This is Kutgun Maral on for Vijay. One on the Studios and one on DTC. On the Studios, can you talk a little bit more about your strategic [Technical Difficulty] over the next few years? And when do you think we'll get to see the execution on your vision manifest more meaningfully from a financial perspective? Can we see more signs of this in 2024, 2025 or do you think it'll still be at least a few years until we get it to full value since it takes a while to reinvigorate franchises? And at DTC, when I look at Max from a content perspective, it feels a lot more like legacy HBO Max, and maybe with a less of a focus on legacy Discovery+. So I was hoping to get a little bit more color on how you think about the content portfolio overall at Max, and if there are areas you expect to invest more or less in going forward. And I guess as we all think about the evolution of the broader media ecosystem and debate M&A scenarios, what I'm really trying to get at is, whether more programming tonnage is necessary to be successful in DTC as we think about the evolution of the broader ecosystem. Thanks.

JB Perrette:

Yes. And Kutgun, on the D2C segment, I guess a couple of points. Number one is, I think, as we mentioned on previous calls, first of all, as we're eight months in, the encouraging thing for us that we've seen is, ours engagement in terms of time spent proactive account has continued to increase and most of that increase has been driven by the inclusion of the legacy Discovery content, so -- and it's not been cannibalistic to the legacy HBO Max content. So we have seen increased engagement, increased hours of views, all driven by the inclusion of the legacy Discovery content. The second point I'd make is, if you look at the top 10 rails, it's pretty indicative. And you'll see oftentimes in there weeks where 90 Day Fiance or some of our other legacy Discovery content are making up three, four, five, sometimes even of the top 10 series on Max. So again, talking to content diversity and the success of the two content portfolios coming together. And then the third thing I'd say is, I think what is exciting about the next sort of 12, 24, 36 months is about a year and a half ago, Casey and the team with the non-HBO content, the Max Originals, really took a turn to sort of focus on bigger, broader WB-based franchises. And when you think of the lineup coming, they're very broad, they’re very four quadrant titles like Penguin, Dune, It, Conjuring, Harry Potter. And so, we feel like we're on a great trajectory. And frankly, the content lineup over the next two-plus years on Max is the most rich and the deepest and broadest that I think it will ever have been, not just on Max, but frankly even within the HBO lineup as well.

Kutgun Maral:

That's very helpful. Thank you both.

John Hodulik:

Great. Thanks, guys. Two, if I could. First, maybe for Gunnar. Thanks for some of the puts and takes for 2024, but just any other color you could give regarding EBITDA and potential growth, maybe break down it by segments if you could? And then on the new skinny sports bundle, just any other info you guys could provide in terms of what the product is going to look like, pricing, economics, and just maybe, David, your confidence that it's not going to accelerate cord cutting. Thanks.

Gunnar Wiedenfels:

Well, and then on the -- on your EBITDA question, John. So I did go through some of the puts and takes, as you said, in the prepared remarks. We are also going to continue calling out factors that will affect comparability over the course of the year. On a segment-by-segment level, if we start with the studio, we've talked about the games cadence last year, this year, and on the film side, obviously this is going to continue to be a hit-driven business. And just last year was a great example with the greatest success in the film studio's history and some real challenges across the industry on the superheroes side. So there is not a lot more to add at this point. For D2C, which clearly is the top priority here from a growth perspective for us, we're committed to maintain profitability, but as we said last time we spoke to all you guys, is we've restructured the business. $2.2 billion of profit improvement in 12 months. From here, the priority is going to be different. We're not going back to subs at all costs, but we want to fuel profitable top line growth, and that's going to be guiding us as we go through this year and beyond. We have the $1 billion bogey for -- before 2025, and JB and the team are going to lay very important foundations this year. We have deliberately not given a more specific target here because we will not be in a situation where we manage the business for results in individual quarters or fiscal years. We'll do the right thing for the company, and especially on the D2C side. That might mean decisions over the course of the year to pull back on individual markets, accelerate into others, respond to how our consumers are receiving our content. So rest assured, we'll do the right thing from the perspective of long term asset value and value generation, but we will not be focused so much on individual quarters or years profitability. On the linear side --

Gunnar Wiedenfels:

Right. And then just to finish up the segments here on the linear side, I mean, you heard us talk about what we're seeing right now, and that is a more optimistic view than we have had throughout most of the past 21 months since we closed this deal, but at the same time, I don't have a crystal ball, and we were not in the business of making longer term projections here. We're going to be as transparent as we can and as much detail as we can about what we're seeing, and we'll continue doing that as we go through the year. What really matters to me is we're going to continue to be very focused on delevering the company. I told you that against the $6.2 billion of cash generated last year, we're off to a strong start in Q1. January was very good. We're going to continue focusing. And I do think that we're still in the early innings here. We have an entire organization with 35,000 people changing their view on how we run the company, how we deploy capital and what we're optimizing for. That's going to have dividends for us for many, many years. So we'll continue to delever, we're committed to our 2.5 times to 3 times target range. And you'll continue to hear us talk about free cash flow generation.

Operator:

Your next question comes from the line of Ric Prentiss from Raymond James. Your line is open.

Gunnar Wiedenfels:

Let me start with the free cash flow question and the view on investment priorities. So I did go through in my prepared remarks some of the puts and takes, and I deliberately do not want to give a specific quantitative free cash flow guidance. We did call out the fact that there was $1 billion of a benefit last year, and that is going to reverse in 2024. There's no question about it. I also took you through some of the below the line helpers here, interest expense and cash out is going to come down. CapEx is going to come down. Restructuring expenses are going to come down. And as I said, we will continue to be very, very focused on capital efficiency. And some of that impact is not going to be individual quarters, but it's a longer term process. And we have already very significantly changed the approach to our investment decision-making and a harmonized process across the entire company. So I have a lot of confidence that these will be very positive contributions over years to come. And as I said before, I'm not in a position this year to give very specific EBITDA or cash conversion guidance. We'll be very, very focused on it. We still believe that our long term target of 60% cash conversion is very doable, very achievable. [indiscernible] continue to focus on delevering the company. And what I will say is, we haven’t really -- we haven’t made any trade-off decisions here between investing in the company and delevering. We have funded our investments. David talked a little bit about the film studio, but we've also made investments on the games side to get to a more consistent cadence of releases over time. We have deployed hundreds of millions of capital into our studio lots and tours and operations, and we have funded every promising content project. And all of that is happening at the same time as we're investing in an overhaul of our systems landscape, et cetera. So we have made a ton of investments. We have great assets. We know where to invest more over time. And as I said, we -- from a capital allocation, capital structure perspective, we remain focused on the 2.5 times to 3 times for now. But you're right, over time, there is going to be more and more optionality.

Andrew Slabin:

Next question, please.

Jessica Reif Ehrlich:

Thank you. So maybe switching gears to advertising, you mentioned a few times that Q1, you're starting to see strength. Can you just give us some color on where it's coming from? How confident you are that this will continue throughout the year, particularly in light of all the increase in inventory, whether it's Amazon coming to the business, Walmart with VIZIO? And then as a follow-up, you mentioned some market launches in some pretty big countries, UK, Germany, Italy, Australia, Japan. Can you just talk about the timing? Some of these markets have limitations, like the UK. And then lastly, any color that you can give on third-party content sales or your views on that? There's just no way, given your library, that you can use all this content on Max.

JB Perrette:

On the Max side, Jessica, in terms of the international rollouts, I mean, I think David -- as David said in his remarks, one of the things that's sort of misunderstood when people look at our subscriber numbers versus certainly our larger peers is the point he made in his remarks, which is that, we are currently available -- our TAM is less than half the size of those larger peers. So that means we have still 2 times the addressable market to go after -- the other half of the addressable market to go after. We are excited that in 2024, we're getting back to growth in new market rollouts, which is the first time in two years as we've been, obviously, hard at work retooling the platform and the technology and getting it right in the US, with LatAm launch next week, Europe starting in the second quarter with two brand-new markets in France and Belgium starting in the second quarter. Asia and Australasia will likely be more by 2025. And then the rest of the European markets for now slated more for 2026. So that's sort of how we see the rollout coming, and we think that's a huge tailwind for us for growth and subscriber growth and revenue growth over the next 24 months.

David Zaslav:

The point that Gunnar made, when we do sell content, we do it only co-exclusively so that we hold on to everything. There's nothing that we want that's on Max that we would sell and wouldn't be on Max anymore. I would put it in two categories. Channing is back in business quite aggressively, the Warner Bros. Television business. We have over 100 series, some of the best series on television, Shrinking, Abbott Elementary, Ted Lasso. We have some of the greatest talent on the TV side working with us. And so, that's back up and we think we're going to see a lot of -- we'll see a lot of opportunity there. On our library, we're incredibly aggressive on the bottom end of it. There is a group of big branded programs that represent the core of who we are as a company. And we're -- those are going to stay with us, and you've seen some big name shows, but most of those have been around for a very long time. They've already been syndicated on other platforms and we're able to reap a significant amount of dollars from them. And so, that will be the balance. We probably have the biggest motion picture and TV library in the world, and our job is to really focus on how to monetize that with different windows.

Operator:

Your next question comes from the line of Ben Swinburne from Morgan Stanley. Your line is open.

David Zaslav:

Thanks, Ben. Look, the UK, Germany and Italy, and I think we've said it before over the last year, are key markets for us. We have deals in those markets with Sky, which is a -- has been a -- over the years, a great partner to us in many ways and will continue to be a great partner to us. But having our own direct-to-consumer product in those markets is a core strategic initiative of ours, and we're already in business aggressively in those markets. In the UK, we have our direct-to-consumer Discovery+ product and we're one of the leaders in sport in the UK where we have what -- our partnership with BT, which we just rebranded as TNT Sports, and that has millions and millions of subscribers. And that partnership is going very, very well. And so, the idea of coming into that market with the wealth of content that we have, and our content is -- we see how well our content works in the UK, Germany and Italy. We could see the ratings of that content when it airs on Sky and the share that it gets in the aggregate. And so we think it's -- those will be real businesses for us and meaningful and real opportunity to grow economics and grow subscribers, but that'll be in -- beginning in 2026.

David Zaslav:

Now, there are markets like, for instance, India, where we did a very attractive deal with Reliance. There are markets where we look and we say that for the near term, even in that case, we did not do a long-term deal, we get a chance to see how all of our content does. And if we think that we can be more profitable and build asset value in a market, we will go. In markets where we don't and the economics are very compelling to sit out for a period of time, we'll do that like we did in India. But Europe is core to us and Latin America. And so you're seeing us really speak to that with these launches, and you'll see it over the next 18 months.

Andrew Slabin:

Let's see if we have time for one more quick one.

Robert Fishman:

Thanks. Good morning. Two for you guys quickly, if I can. David, you've been vocal about the idea of rebundling. Do you think it's inevitable that the digital streaming ecosystem will end up looking a lot like the old MVPD world? And maybe if you can talk about the benefit of bundling Max with other streaming services like Netflix through Verizon. And then for JB or Gunnar, can you talk about the future of Bleacher Report sports add-on product, given the sports JV announcement and anything you can share in terms of the engagement with sports on Max to date with the free option? Thanks so much.

JB Perrette:

And I think Robert, on the B/R Sports part of the question, it really -- it dovetails exactly with what David just said, which is we look at the overall the sports venture, this new sports venture, and the ability for the partners to bundle with their existing streaming services, and with our case, with Max is great for the consumer, make it much more simplified. And as it relates to, what does that mean for the existing B/R Sports that are on Max, look, we'll have more to share with that over the coming months as the -- we get closer to launch the venture, but obviously, it's incredibly compelling to be able to say that we'll be able to take the incredible entertainment offering that will be on the -- that is on Max, along with the great aggregated, simpler, more compelling consumer offering of the joint venture and put those two together and offer them in a compelling fashion to the subscribers. And as just as a note, obviously, in the meantime, we're continuing to lean in on the Bleacher Report sports offering, and we're incredibly excited over the next few months to bring all of our March Madness, including building up to the Final Four on Max for the first time here over the next 45 days, and then leading into the NBA playoffs a little bit later in the spring.

Andrew Slabin:

Good morning and welcome to Warner Bros. Discovery's Q3 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and 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 the company's filings with the U.S. Securities and Exchange Commission, including but not limited to the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q3 earnings release, trending schedule and accompanying slide deck will be available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

BatVerse:

And in 2025, we'll have brand new seasons of The Last of Us, Euphoria, White Lotus and more. We're confident this great new content will further fuel Max's popularity, both domestically and around the world. Coupled with our new live programming, it really does provide an exceptional offering for consumers. In October, we launched CNN Max, a 24/7 streaming offering with live news, analysis and original programming from the most recognizable news brand in the world. And while CNN is a strong linear asset, we also appreciate there's a segment of the population, mostly young people, who don't subscribe to cable, and this new streaming product appeals to them as well, as evidenced by CNN Max viewers being nearly 20 years younger than traditional linear viewers and the vast majority of our CNN Max viewers being non-pay TV Subs. We are analyzing everything we're learning in these early stages and we'll continue to iterate and improve the offering. But the key takeaway here is that we saw an opportunity and we were able to pivot quickly, seamlessly and decisively. And by providing CNN Max on the service, we're expanding our audience and our impact. The fact is what CNN does has never been more important or more impactful, and no one does it better. In my view we have the very best journalists in the business. Right now we have over 70 people on the ground across Israel, Gaza, the West Bank and Lebanon and we've also got teams in Ukraine. They're in harm's way, working around the clock, reporting on these conflicts. And our teams bring not only their news reporting skills, but their deep knowledge of the regions, the geopolitical actors and the conflicts to bear in a way that really benefits the audience. If you go to the White House, the Pentagon, the State Department, Congress, Embassy Row, CNN is on and it's on in homes across the U.S. and everywhere across the globe. Our new Chairman and CEO of CNN Worldwide, Mark Thompson is in the seat now. He has visited nearly all of the offices and has already spent considerable time with leaders and employees. We couldn't be more thrilled to have Mark at the helm. CNN is coming off a strong month in October with our new prime time programming lineup off to a very strong start and audience levels for the U.S. network up double digits year-over-year in key demos, while also outpacing the competition on both linear and digital platforms where CNN remains the number one digital news outlet in the world. We're excited to build on this momentum. We also launched Sports on Max last month with the Bleacher Report Add-On Sports tier which will include over 300 live sporting events annually starting with the Major League Baseball post season games which were incredible and now NHL and the NBA through the playoffs as well as NCAA Men's March Madness, U.S. Soccer and more. It's a huge advantage for us to have live sports and news together with our bouquet of scripted entertainment, nonfiction and one of the best TV and motion picture libraries in the world. Not only does this make for an even better offering for consumers, as evidenced by the millions of subscribers who have enjoyed our sports and news offering in only the first few weeks, but it's also helping habituality, which is the most strongly correlated influence on churn. Similar to news, sports is bringing in an incremental and younger audience with Max viewers, on average 12 years younger than traditional linear. We'll be launching Max in Latin America in the first quarter of 2024, followed by the Nordics, Iberia, Netherlands and Central and Eastern Europe starting in the spring. The service will launch in France and Belgium in 2024 as well, our first entirely new markets. And in markets where Max will not yet be available, Discovery Plus and Max will be the only place where fans can get every minute of the Olympics in Paris next summer. Lots to look forward to. I also want to remind people that Max and HBO Max are still only available in markets that reach 45% of the world's broadband households, even excluding China, Russia and India. And while we will stay financially disciplined in our decision making, we have significantly more growth to come over the next two to three years as we expand to over half of the world where we are not yet available. Looking across our full portfolio, another area where we see particular opportunity is in gaming where we have 11 world class studios and are unique amongst our media peers as both a developer and publisher of games. Research has shown that Gen Z and Gen Alpha prefer gaming to any other form of entertainment, more than social media, more than watching television or listening to music, more than going to the movie theater. Games will be even more important to our fans in the future, and so having this asset in our arsenal is a critical differentiator and a real growth opportunity. As a developer and publisher, we control quality and enjoy the full economic benefits of the games we produce as well as capturing the broader franchise benefits across the company. In 2023 we've released two of the industry's top 10 console games, including the number one game released this year, Hogwarts Legacy and we still have the Switch version to come, launching next week. Our Harry Potter fans have immersed themselves in Hogwarts legacy, playing more than 700 million hours to date. That engagement helps not only our games business, but also helps build and revitalize the entire Harry Potter franchise and we know our fans want even more. We've worked really hard on our games business for the last year and a half. And it's also a business where we have had a strong track record. Games have been a very successful and steady segment for Warner Bros. for over a decade. We've been profitable in each of the last 15 years averaging more than $400 million in EBITDA the last three years alone. We believe games is a critical and very valuable asset for the company with a great deal of potential for growth. Games has consistently enjoyed among the highest ROIs of any of our businesses. And while we're smaller than some of the leading pureplay gaming companies, our operating margins are comparable to the best of the public companies. We're clearly punching above our weight and we're just getting started. And similar to the leaders in the industry, we've led with multiple key franchises, each of which is $1 billion gaming property. Harry Potter, Game of Thrones, DC, which is mainly Batman today, and Mortal Kombat, whose most recent release, Mortal Kombat 1 has sold nearly 3 million copies since its launch in mid-September. So we've got the proven IP and franchises, the world class studios and publishing talent and we intend to continue to invest more capital and more resources into the business. Our focus is on transforming our biggest franchises from largely console and PC based with three-four year release schedules to include more always on gameplay through live services, multiplatform and free-to-play extensions with the goal to have more players spending more time on more platforms. Ultimately we want to drive engagement and monetization of longer cycles and at higher levels. We have put specific capabilities. We are currently under scale and see significant opportunity to generate greater post purchase revenue. Bottom line, we've come a long way in 19 months and have built a very solid foundation for growth. I'm energized by what we've done in such a short period of time and even more so than where we are headed as a company. As I said at the outset, our industry is undergoing great disruption and while there are some key factors that are out of our control, like the economy and the impacts of the strike, we do have a very strong handle on those areas of our businesses that we can directly influence. Clearly, there is still much more to be done and our sleeves are rolled up and we're hard at work. I'm as confident as ever that we have the greatest assets, the strongest creative team and the absolute resolve to make Warner Bros. Discovery the very best it could be. With that, I'll turn it over to Gunnar and he'll walk you through the financials. Gunnar?

ex:

This quarter, we repaid another $2.4 billion of debt, enabling us to address nearly all floating rate debt that was issued to finance the transaction. In October, we further repaid an additional $600 million of the term loan, leaving only $550 million of this variable and lately higher interest rate debt and bringing total debt repayment since closing up the transaction to nearly $12 billion. We will continue to reduce debt as we generate cash and net leverage will be comfortably below 4 times at year end as previously guided. I am proud that WBD will exit this year with a fundamentally improved financial profile as compared to the beginning of this year regarding command and control, cost structure, profitability and cash flow generation and the balance sheet. Briefly on our Q3 segment results, which I will as usual discuss on an ex-FX basis. Overall, studios revenues increased 3%. Barbie, the highest grossing movie of 2023 thus far and the highest grossing movie in Warner Bros. history, was the primary driver of segment revenue. Games was also a contributor, which benefited from the release of Mortal Kombat 1 in September. Of course, weighing on this was the impact of the strikes on the production and delivery of TV content, as TV revenues declined significantly, offsetting strong films and games performance. We also face tough comparisons against certain content licensing deals last year. Finally, segment EBITDA decreased 6% in part also due to greater marketing support behind film and game releases. At Networks, total revenue and EBITDA were impacted by a modest decline in distribution revenue and the continued challenging advertising marketplace, predominantly here in the U.S. where the market has continued to be weaker than we had hoped, while international markets on balance remain more stable in comparison. Looking ahead to Q4, we will be helped by the strong deals we secured for the upfront year 2023-2024 and improving ratings trends on some of our core networks. Taken together, while the market environment continues to be soft, we are expecting an incremental improvement of our network segment ad sales in the fourth quarter. Turning to D2C, we ended Q3 with over 95 million subscribers, representing a modest sequential loss, largely as a result of an extraordinarily light content slate and some expected decline in the overlapping discovery in Max subscribers. Revenues increased 5% as our core subscriber related revenues distribution and advertising through 5% and 29% respectively, while content decreased 17%. Distribution growth was primarily due to price increases in the U.S. and certain international markets as well as a more favorable subscriber mix as noted previously in wholesale subscribers which have been declining, tend to have lower ARPU's than retail subscriber. D2C Adjusted EBITDA was positive $111 million representing a $745 million year-over-year improvement helped by both revenue growth and OpEx improvements with cost down 21%. Our D2C team has done a remarkable job improving the quality and financial profile of our streaming business. Only 19 months into the combined operation as Warner Bros. Discovery and a few months after the launch of Max, we are now on track to at least break even or even profitable across the D2C segment to swing up approximately $2 billion versus last year and very well ahead of our own plan. This is an incredibly valuable asset and provides a strong vantage point for our path to long-term sustainable growth. Turning briefly to consolidated results, revenues increased 1% to nearly $10 billion, while adjusted EBITDA increased 22% to $2.97 billion. Year-to-date, adjusted EBITDA has improved by nearly $1.2 billion year-over-year on a pro forma basis, even with pro forma Networks advertising revenue now down nearly $1 billion in the first nine months of this year and the headwind from the ongoing work stoppage in Hollywood. We continue to expect that adjusted EBITDA for the full year will be in the $10.5 billion to $11 billion range. Factors impacting where within that range we end naturally include the tone of the scatter market in the U.S., the performance of our three remaining feature film releases in December, as well as the timing of content licensing. Free cash flow for the quarter was a positive $2.1 billion versus the negative $200 million in the prior year quarter, which recall was the first full quarter of the combined company. The nearly $2.3 billion positive swing year-over-year in this quarter alone illustrates the meaningful strides that we have made on all fronts. Admittedly, the swing also includes some benefits from the strikes. So the vast majority of the improvement has been the result of our transformation efforts and relentless focus on efficiencies across the enterprise. From finding deeper cost synergies with more than $3 billion of incremental cost synergies flowing through this year to driving working capital improvements and far greater discipline on capital allocation. I continue to believe we're still very much in the early stages of realizing the full benefit of many of these initiatives. I expect full year free cash flow to be similar to the trailing 12 months at the end of Q3, i.e. in this $5.3 billion range give or take with some further strike related benefits balanced against the tough comp in Q4 free cash flow last year when we converted nearly 100% of our EBITDA to free cash flow. Looking ahead to 2024 and with some preliminary thoughts from early stage budgeting, I'd like to provide an initial perspective on a couple of points. On the positive side, I continue to be confident in our ability to further drive and maintain cost discipline. By the end of this year, we will have realized over $4 billion of cost synergies and we will have already implemented initiatives to deliver more than $5 billion through 2024 and beyond, as I have detailed in the past. Second, with our strong cash generation, significantly reduced leverage, the outstanding results our games business has delivered, the turn to profitability of our streaming business, and the clear value in our ability to drive franchise returns across the company, we see more and more opportunity for investing in sustainable profitable growth. As David alluded to and as we shared with you over the last quarter, as we are planning for 2024, we are examining ways to reinvest at a slightly faster pace into these growth avenues. This will be most relevant in areas such as marketing support for Max in the U.S. and in conjunction with launches in Latin America and EMEA, including new markets, particularly given the high profile release schedule Casey has assembled and the Olympic Games in Paris next summer. Our disciplined framework centered on rigorous analysis of subscriber acquisition costs, customer lifetime value and return on investment will firmly guide this process and support continued traction and revenue growth while maintaining our focus on longer term segment profitability targets. On the challenging side, it is becoming increasingly clear now that much like 2023, 2024 will have its share of complexity, particularly as it relates to the possibility of continued sluggish advertising trends. To that point, while streaming advertising remains robust, the state of the overall linear ad market during the second half of this year has been disappointing. And looking ahead, while it is early, the timing of an ad recovery is currently difficult for any of us to predict with any conviction. And finally, as we begin to formulate the initial framework of our TV production business getting back to work into 2024, there is simply a lot we don't know yet. While we have every confidence that this will eventually ride itself throughout the next year and there should be an eventual tailwind from the end of the work stoppage, this is an evolving process and there is a real risk at this point that some negative financial impact of the strike will extend into 2024 to some extent. Here's what these factors mean as we look ahead. We will exit 2023 with great momentum and leverage reduction. We have taken significant financial and operating risk off the table over the last year and we are fully committed to our gross leverage target range of 2.5 to 3 times adjusted EBITDA. That said, taking together the factors just mentioned for an early view on 2024, it is unlikely from today's perspective that we will hit our target leverage range by the end of 2024 without a meaningful recovery of the TV ad market. We remain hopeful. Indeed, we expect to continue to generate very meaningful free cash flow. Key building blocks to consider for 2024 free cash flow remain #1 around $1 billion tailwind of cash cost to achieve largely going away, #2 lower cash interest expense and #3 further progress in AR and AP driven working capital initiatives, offset by the potential headwinds I've noted most importantly, a potential further decline in U.S. advertising and of course, the return to a normal content capital spend, as well as the incremental growth investments I noted earlier. I remain very comfortable with our leverage and our delevering path as underpinned by the strength of our free cash flow conversion. Looking at our maturities over the next five years, the average amount of debt coming due is below $3 billion per year. Our debt stack is long dated and low cost with the nearly 15-year average maturity and a weighted average coupon of a little over 4.6%. With the vast majority of our remaining debt being fixed, we will be largely insulated from rising rates and in fact, we'll have increasing opportunity to retire debt at a significant discount. As I stated at the beginning of my remarks, in a very compressed time frame, we have made very significant progress as an organization in what remains a very complex and disruptive period in the industry. And our transformative efforts have better positioned us to compete, to respond to industry dynamics and to participate with strong operating leverage when the macroeconomic and at market backdrop eventually turned positive. And with the initial phase of integration work largely behind us and the free cash flow engine continuing to fire on all cylinders, we are more focused than ever on driving sustainable and profitable growth that will enhance the financial and competitive profile of the company over the next several years with real upside to shareholder value. Thank you again for your time this morning and now David, JB and I are happy to take your questions.

Steven Cahill:

Thank you. Good morning. So, David, you've now experimented a bit more with licensing, putting some shows on some major streaming partners from the HBO library. And I think you've successfully had licensing arrangements in the past such as the deal with Sky. So as you think about some of that really strong HBO content going forward, whether it's library, whether it's prior seasons of shows that are returning like True Detective or whether it's some of the franchise shows like Friends, how do you think about what should be on Max and what can be elsewhere, particularly when there's partners that are willing to pay a lot and maybe have bigger reach than Max? And then you talked about the engagement that you've seen on Max from CNN and sports and Bleacher. I'm curious whether you think that content sits on Maxwell and justifies the cost and on the sports side, where do you see kind of sports emerging into streaming over the long-term, is it an add on tier? Is it integrated? Are you interested in partnerships with other DTC sports services like we've heard from up here? Thank you.

Steven Cahill:

Thank you.

Jessica Reif Ehrlich:

Thank you. I mean, it's clear you've done an amazing job restructuring the company and improving the balance sheet. But as you can see, even from today's numbers, the persistent headwinds from linear, which is your biggest business. It's just such a challenge. So as you think through the next few years and you've kind of outlined some of the growth areas like games and sports and news, and maybe some of the traditional areas like film and driving DTC with critical IP. I'm just wondering, how are you thinking? Is that enough to offset these linear challenges? And in your conversations with advertisers, which is a big revenue driver, is it coming back to traditional or is it just permanently moving to digital and AVOD and retail? And I guess the last part of that is, you have an amazing library and it is underutilized. So can you help us think through does it show up in film? Does it show up on TV, DTC, et cetera? Thank you.

Gunnar Wiedenfels:

We're not giving up. We really believe in linear. And in fact, there was a lot of noise around the Charter deal with Disney. But to Bob's credit, that deal was structured in a way that's really favorable for both parties and favorable for the ecosystem. The idea that all of the cable subscribers are now paying a fee for Disney Plus is a positive, as they have said, the churn on that will be very low and the reach will go up and they'll be able to sell advertising of course, an environment where there is now that is likely to help linear in creating a bridge. And you can imagine a world as we're redoing our deals or even advance of redoing our deals to get Disney Plus and Max as an additional benefit to the cable subscribers and to be getting paid on each one of those and having – being able to sell advertising against each of those and having lower churn on each of those. And so I think it was a very innovative deal by Charter and Disney and although it started out noisy and scary, I think it created potentially a very interesting bridge to more scale, lower churn and more stability to linear. We'll have to see. It certainly is a positive. And so maybe to comment on a couple of the growth opportunities that you mentioned, Jessica, I do think there is tremendous opportunity and I do think we will be able to get behind that. That's why David talked about shifting the investment focus a little bit. But starting with the games business, we've spent a lot of time over the past year going into a lot of granular detail across all of the areas of our capital allocation. And the games business has shown tremendous success, not only from a P&L perspective, really, as David said, contributing hundreds of millions of dollars to our consolidated profits, but also from a return on investment perspective. I've double and triple checked some of the metrics here because it's such a great investment opportunity. I'm stunned that we haven't been investing more into this opportunity under JB's and David Haddad's leadership here, and I think we have to do more. There's a lot more opportunity there and we're going to start tackling that. On the D2C side, again just take a step back here. Over just a year and a half, we're now looking for this year at a breakeven positive business after $2 billion of losses last year. We've right sized the structure. We've got a state of the art platform. As David said, we're coming off of a quarter with virtually no fresh content on the platform. We want to get behind that. When we come back, when Casey's content comes back to the platform, we want to get behind it. We know that we can get tremendous returns on our marketing spend behind new content and we will take advantage of that. And I do think we have a real opportunity here. On the film side and the TV production side, as I said, it's still a little fluid. Unfortunately, we still don't have a resolution for the strike yet. But clearly that business should be coming back to growth after being a very significant drag in the second half of this year. So a lot that we want to get behind and a lot that I think is going to contribute to growth for the company. And also on the linear side itself, we're not on the sidelines. I mean, we're not just standing by and watching. There's a lot that the team is working on, Bruce Campbell and John Steinhoff have restructured the sales team. We've got more opportunities in dynamic ad insertion. We've got more opportunities in utilizing our data. With every additional AdLite subscriber, we're going to get additional reach, additional scale, which helps on the pricing side. So there's a lot going on. Again, I decided to be as open about the ad market this morning, as I was because we feel we have to be transparent here. But there's a lot we're doing. And as I said, we're hopeful.

Operator:

Your next question comes from the line of Robert Fishman from MoffettNathanson. Your line is open.

David Zaslav:

Maybe I can start here. So clearly, again from a year-over-year perspective, we're going to see increases in content cash spend next year just because we haven't been able to deploy at full speed here over the second half of 2023. But again, if we look at the change in our overall posture for content allocation, there has been a bit of a strike impact, no doubt. But we have also, as you know, significantly right sized our spend across the various genres on the basis of a thorough analysis of return on investment. And some of that was expressed in some of the content write offs that we did early when we combined the two companies. But that's also led to a reset in our overall capital allocation. And when we say we're going to invest, that doesn't mean that all of that has to come on top. There is an opportunity to reallocate within our very significant and broad content portfolio here. But net-net, as I said a couple of minutes ago, there will be a headwind to free cash flow from reaccelerating content spend next year. And before I pass it on to JB, we stand by our profitability targets long term for D2C. We do believe that this can be a very profitable line of business as a part of an integrated media portfolio. If anything, I have to say, we're doing better than we thought and we're moving faster than we thought, which is expressed. If you just compare what we're doing this year relative to what we guided a year ago, a year and a half ago, we're well ahead of that curve, which puts us in a position to focus on growth a little more as we go into next year. JB?

Operator:

Your next question comes from the line of Rich Greenfield from LightShed. Your line is open.

Gunnar Wiedenfels:

Yes, Rich, let me maybe start right there, because I did not intend to guide down EBITDA for next year relative to where we are today. The only reason I brought this up is we had guidance out there of hitting our leverage target range by the end of next year. And again, based on the early indications that we're seeing from how the market is developing right now, I'm just not confident to stand here today and say, don't worry about it. We're definitely going to hit that range. Now, if you have a view on ad market recovery, and if you think there is an ad market recovery in 2024, we're going to have a great year. I'm just not in a position right now to provide firm guidance to that. I've laid out some of the building blocks again, a much more profitable streaming business, which we're going to try to fuel growth. But again, let me be clear, that doesn't mean that I'm expecting to start losing money again. We're just shifting marginally to prioritize growth over sort of the maximization of immediate profit growth. Linear business, the network business, it is what it is. And I'll talk about the cost side in a second. And then on the studio side, we should be seeing a recovery as the strike hopefully comes to an end. But it's too early to be any more specific here. To your point on the linear cost base, first of all, I do want to just call out how, what a great job Gerhardt, Kathleen and others, including at CNN, people have done in right sizing the business as we brought these two companies together. And I think we're looking at a very competitive cost structure, which is one of the reasons why I'm so confident that when the market comes back, we're going to be participating with a pretty high flow through to profits. But as I said earlier, we're not going to be standing on the sideline here and just watching. There's a lot more that's in the pipeline. Some of our transformation initiatives, especially on the technology side, just have longer lead times. And we're still evolving when it comes to, let's call it, the operational backbone of how we operate our content workflows throughout the company, by the way, not only impacting the network segment, but the company as a whole as well, so there is definitely more opportunity there. And then one other point that I've made before is, again, we decided to go with this three segment reporting structure because that's how David looks at the company and how I think from an investor perspective, you get the full transparency into the different business models and their financial profiles. But one thing that's going to be increasingly relevant is managing our content investments and our content utilization across one Warner Bros. Discovery. And that's one area where so far it's been a bit of a one way street of the studios and networks creating content that ends up on the streaming platform. Longer term, as that platform grows and drives more revenue and profit contributions, there may also be a flow in the other direction which inevitably will drive profitability of a linear business beyond what we have today.

Benjamin Swinburne:

Good morning. A couple of housekeeping. Gunnar, I was wondering if you are able to quantify the benefit to cash flow from the strike this year. I know it's still a moving target. And then also whether there's a way to quantify the sort of incremental synergy capture you expect next year versus this year. You had some numbers in your prepared remarks. And then maybe a more interesting question for David. David, the strategy around expanding Max with news and sports seems quite logical and compelling. You're adding reach, maximizing distribution, ultimately revenue. And it seems like you think the charter Disney read is a positive one, which I just wanted to hear more about because I could also see the other side of the argument, which is taking your core linear IP and CNN, the NBA baseball, et cetera, and putting it on Max could actually cause some consternation on the distribution side of your business. So maybe you could spend a minute just talking about how you see that glide path working with your Max strategy. Thanks a lot.

Gunnar Wiedenfels:

Yes, I was going to add, the only other thing, Ben, is you have to remember HBO and HBO Max and Max now have really been doing the opposite of what the industry has sort of been complaining about, which is for HBO subscribers, we've been giving more value to the bundle, not less. They used to get a number of HBO original series and movies. They now, in 2023, get all of that, plus a whole host of library content from Warner Bros. That they never receive Max originals that they never receive. And so our position in the market for years has been providing more value to the cable ecosystem for those subscribers, not less. And the charter deal really creates this very creative path of, instead of having two completely separate ecosystems, the idea that you could have a distributor that's paying us a per sub fee for discovery+ and a per sub fee for Max. And both of those being ad Lite is an incremental advantage. It's an advantage to charter. And they and Bob came up with this creative road forward. But I think, and we think that it stabilizes the ecosystem, but it also is helpful in building more scale. JB, you and I were modeling it out the other day.

Gunnar Wiedenfels:

And we got the cash to invest in promoting it, to invest in taking it around the world, and to invest in whatever else we think we need to grow. I mean, the key element here of this company now, this company is a free cash flow driven company. Over $5 billion in free cash flow, $12 billion paid back so far in 19 months. We said we were going to be less than four times levered. We will be less than four times levered comfortably. So it's all about, I believe, not only the quality of the content, but what's the stability of the company. It's all about free cash flow, who has it and who doesn't.

Operator:

And your final question comes from the line of Brett Feldman from Goldman Sachs. Your line is open.

David Zaslav:

Sure. Let me start by saying we've gotten through, including recently, all of our deals with all of our channels being carried. We really do have a different model. We have Affinity networks, HGTV, Food, TLC, Discovery, Animal Planet and we're investing in TBS, TNT, we're investing in all those channels. We still believe in linear. And with sports and news, we're anywhere between 25% and 45% of the viewership on cable. So when you think of what is basic cable, it's us. And when people think about what they love, the three, four, five channels that they love, it's us. And we're not that expensive. We're not proud of it. But one of the reasons we've been able to continue to get increases is because we provide real value. And we're one of the few media companies that's still investing significantly in original content and we're nourishing our audiences. And if you look at our ratings in the last couple of months, Kathleen's doing a terrific job. The ratings on our networks are going up. And so we feel really good about our deals. We feel good about partnering with the operators in building and continue to hold on as much as we can to the linear marketplace. And we can make some tradeoffs. There's a few of our channels that are lighter. We can make some tradeoffs, but I think it'll be additive. And I think it'll be a real advantage to us to have somebody else in the marketplace that wants to retail and guarantee a payment of a significant number of subs to us.

Operator:

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.

Andrew Slabin:

Good morning and welcome to Warner Bros. Discovery's Q2 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private is Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and 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 the company's filings with the U.S. Securities and Exchange Commission, including but not limited to the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q2 earnings release, trending schedule and accompanying slide deck will be available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

Gunnar Wiedenfels:

Thank you, David and good morning, everyone. We have been hard at work at WBD and much of our focus over the past 15 months has been on driving thoughtful efficiencies, merger-related and otherwise and on implementing a cash flow mindset across the whole company. Our second quarter results demonstrate the fruits of that labor. Our disciplined transformation efforts have not only been a key factor in our ability to drive financial outcomes but they have also made us ever more confident in the strategic vision we presented early on following our merger. Simply put, we have begun to conduct our business fundamentally differently. And some of what we identified very early on as a near and long-term potential, we are beginning to realize. These are durable performance improvements borne out of true change and we see a lot more opportunity. To that end, adjusted EBITDA grew 23% in Q2, marking the second consecutive quarter of meaningful year-over-year adjusted EBITDA growth. Year-to-date, adjusted EBITDA is now up more than $600 million despite a persistently challenging macroeconomic backdrop. We have accelerated the delivery of our transformation initiatives, where appropriate and have already delivered more than $2 billion in incremental cost synergies thus far this year. This has allowed us to offset the impact of the market challenges and grow profits, while at the same time, funding many foundational investment opportunities. Our transformation team is still very much focused on generating new initiatives and, based on the successful implementation I am seeing and the size of the funnel, I am confident that we'll achieve $4 billion in total synergies much sooner than previously thought and now see a clear path to achieving $5 billion or more through 2024 and beyond. Our second quarter free cash flow of over $1.7 billion is strong proof of these efforts. Clearly, it was a healthy number and nicely ahead of our expectations. I am incredibly proud of this result, not only because it allows us to continue to quickly delever but perhaps, more importantly, I'm excited because this outperformance is coming through across a number of components of our cash flow statement and I view this as true cash focus becoming evident across the company. Key factors of the outperformance were, number one, slightly better-than-expected adjusted EBITDA. Number two, improvements across virtually all elements of our working capital and other below-the-line items, part of a very long runway of opportunity that we are beginning to chip away at. Number three, the closing of the gap between cash spend and amortization, partly due to shifts in the timing of production and partly as a result of implementing our new content strategy initiated last year. Number four, modest cash savings from the impact of the WGA and SAG-AFTRA strikes which we estimate were in the low $100 million range during the quarter. We also absorbed $200 million of cash restructuring and integration-related expense during the quarter, in line with our expectations. We repaid over $1.6 billion of debt, $1.1 billion of the term loan and over $500 million of notes. As you saw, we launched a tender offer this morning for up to $2.7 billion of notes that are maturing through the first half of 2024. Our net leverage came down significantly this quarter and is now at 4.6x. Consistent with our capital allocation policy, we remain focused on debt pay down and have a clear path to net leverage nicely below 4x at the end of the year and reiterate our expectation to achieve target leverage of 2.5x growth by the end of 2024. Turning now briefly to the segments which I will discuss as always on a constant currency basis. Starting with D2C. I'm very encouraged with the results that effectively breakeven EBITDA and quite a bit better than we expected, notwithstanding the significant investments in the development and marketing of our new Max platform in the U.S. Q2 nicely demonstrates the underlying traction and efficiency from the integration of legacy D2C operations and organization. I do want to call out, while we saw growth across all 3 revenue streams, content was the standout, helped by the timing of license deals. And while selling content to third parties has been and will be a core element of our company-wide operating model, we would expect some smoothing out of content licensing in the second half of the year. We saw a sequential net subscriber loss of $1.8 million in Q2. As expected, trends were impacted by overlapping subscriber bases between Max and discovery+, expected churn from the end of some key tentpole series, such as The Last of Us and Succession; and wholesale declines, including the unwinding of some very low ARPU international wholesale distribution deals that were struck under the prior strategy that prioritized subscribers over ARPU, profitability and value. And with respect to the overlapping subscriber base, we did see several hundred thousand subs churn off during the quarter, meaningfully less than we had anticipated. And while we do expect to see some more elevated churn on discovery+, we also see engagement patterns consistent with what we saw prior to Max launch, making us optimistic that our strategy to keep offering these 2 products was the right one for customers and for our business. Our streaming team really did an outstanding job with this transition. We continue to see traction on the streaming advertising opportunity, supported by gains in ad-light subscribers, early initiatives on HBO and Max Originals and increased engagement. While the overall advertising market remains soft, we see the streaming and advertising opportunity well positioned to benefit from secular tailwinds over the long term. This is particularly true against the backdrop of the enormous value of some of our iconic shows for advertisers who, in the past, have no access to this inventory. We remain focused on further scaling this segment of our offering and the relaunch of Max will certainly be a driver, both here in the U.S. and later abroad. I am proud of the meaningful strides we made in the first half of the year and see D2C as an important contributor to total company profit growth year-over-year in the second half. Turning to studios. The studios' performance has clearly been inconsistent. Our box office results in Q2 underperformed our expectations which weighed on financial results. And it's ironic to have to say that given how incredibly successful Barbie has been impacting Q3, of course, not Q2. Unpacking this a bit, overall content revenues declined 25% due to, number one, the slate, as I mentioned. As well as the timing of production of certain TV series and fewer CW Series orders following the Nexstar transaction. Number two, lower internal sales to networks and D2C, in part resulting from the more disciplined content investment and programming approach we've implemented, such as exiting direct to Max movies or certain scripted series on linear, for which we felt ratings did not justify the investments. Please note, these lower revenues are offset in lower eliminations on the group level but impacted segment level revenue. And number three, finally, in gaming, The LEGO Star Wars game was released in the second quarter last year which created a tough comp for this year. Looking ahead, we're naturally delighted with the performance of Barbie thus far which is now approaching $1 billion in global box office and we're excited about its prospects through its remaining monetization window. For the remainder of our feature films this year as well as Warner Bros. television inductions, release dates and performance expectations are naturally fluid given the ongoing strikes and we will evaluate our options and update the market accordingly. But it is possible we will see greater variability against our forecast. Turning to networks. Advertising decreased 13%. As we called out last quarter, we faced tough comparisons as we did not have the NCAA Final 4 and championship games this year. And although we did have the Stanley Cup finals for the first time, the net impact of these 2 sporting events was an approximate 200 basis point headwind. Adjusting for this, we did see underlying sequential improvement. I would characterize the broader tone of the marketplace thus far in Q3 as similar to that in Q2, certainly here in the U.S., while international markets are broadly a touch stronger. That said, as David mentioned earlier, we are making strong progress on our upfront deals. Key callouts from my perspective are, number one, linear volume expected to be up, with pricing on balance pretty consistent with the prior year. Number two, D2C volume is up more than 50% in the marketplace in which CPMs were positioned to drive scale, for us as much as for the broader market. While visibility overall remains limited and the scatter market inconsistent, we expect continued modest sequential improvement through the end of the year and forecast global networks advertising revenues will decrease in the high single-digit range during the second half of the year, with Q4 sequentially better than Q3 which is overall meaningfully worse than our forecast from earlier in the year. Distribution revenues decreased 1% with a modest improvement versus last quarter as we continue to be pleased with the pricing and tiering of our networks and renewals, represented by their importance to both traditional and virtual bundles. Before wrapping up the segment discussion, I'd like to offer an update on the AT&T Sports Nets. I am very pleased to say that we have been working diligently with the respective leagues and teams to formulate a plan to exit the RSN business in a manner that minimizes the disruption to teams and their fans. We expect each of the networks will be sold or operation seized by the end of the year. While we've positioned these to operate at adjusted EBITDA breakeven, this business generated nearly $400 million of revenues in 2022 and skewed heavily towards distribution revenues. As these networks are sold or wound down over the next few months, we expect a modest impact to Q3 distribution and advertising revenues, with a more meaningful impact in Q4 and into 2024. Turning to guidance and our outlook for the year. Let me start with our most important financial metric, free cash flow. For Q3, I expect us to again generate free cash flow in the $1.7 billion ballpark, reflecting similar underlying trends as in Q2, with sequentially larger savings from the strikes as well as the success of Barbie, notwithstanding the roughly $900 million of semiannual interest payments. And based on this outlook, the health of the underlying free cash flow drivers and further opportunities in the pipeline, I see full year free cash flow in the range of $4.5 billion to $5 billion. This also assumes cash restructuring and integration-related costs for this year of roughly $1.2 billion which is a couple of hundred million more than our prior expectations. For adjusted EBITDA, I am now assuming we'll settle towards the low end of our target range of $11 billion to $11.5 billion. The key drivers for the final outcome will be centered around ad sales, D2C profit growth and contributions from the Studio segment. Let me provide some puts and takes. First, the timing and magnitude of a potential ad market recovery continued to be the most important driver of upside and downside to our results. Second, the D2C segment has been a driver of our year-over-year EBITDA improvement and we expect that to continue, helped by efficiency gains and top line benefits. We see segment EBITDA losses of no more than a couple of hundred million dollars for the full year 2023. Third, uncertainty in the studio segment has increased with the dual strikes. This may have implications for the timing and performance of the remainder of the film slate as well as our ability to produce and deliver content. And while we are hoping for a fast resolution, our modeling assumes a return to work date in early September. Through the strikes run through the end of the year, I would expect several hundred million dollars of incremental upside to our free cash flow guidance and some incremental downside for adjusted EBITDA. When I take a step back, notwithstanding the factors influencing the broader landscape, I am more and more convinced that the dedicated work of the leadership team and efforts throughout the company, marked by a meaningful shift in mindset about how to manage this company, is starting to pay dividends. I believe our financial results this quarter speak volumes about this change. I am very confident in the trajectory of our delevering and debt pay down, the benefits of which will increasingly allow us to turn our dedication and focus to support further growth initiatives to ensure long-term, sustainable and profitable growth ahead. With that, I'd like to turn the call back to the operator and take your questions.

Kutgun Maral:

This is Kulgan Maral on for Vijay. One on M&A and one on the synergies. First, on M&A, based on commentary from your peers, it seems like there might be a willingness from some to reshape the media landscape a bit and that certain linear or maybe even streaming assets could slow hands. From your end, it seems like there's a lot of comfort in getting to your leverage targets, the synergy capture machine is firing on all cylinders, free cash flow should ramp going forward. And of course, the second anniversary of the merger is closed, if not too far away. So can you talk a bit about your latest views on M&A? And what's your appetite from a strategic or financial lens? And on synergies, Gunnar, can you expand on your comments earlier a bit and help us understand where this increase to $5 billion is coming from? And how should we think about the timing flow-through in 2023 and 2024? Should we expect this $1 billion upside will mostly be reinvested in the business? And then are there any changes to the total cash cost achieve that we should be mindful of as we think of free cash flow over the coming years?

Gunnar Wiedenfels:

Yes. And Chuck, on synergies, the headline here is as David has said so many times, we have completely changed the way we're running a business here. This is not about synergies. This is not about an integration. It's just a fundamental shift in mindset that continues to come through. And again, the -- you saw the free cash flow number in the second quarter. I'm just amazed by the results and it's coming through everywhere. And there -- as I said, there was a small strike impact here. But without the strike, it would have been a $1.6 billion number instead of a $1.7 billion number. And I'm pointing this out because it's not 1 or 2 things that stick out here, it's cash coming in everywhere across the P&L and then below the line. And so as I said a minute ago, we've achieved the $2 billion of incremental value capture with our transformation initiative. I do see $5 billion or more. And again, as we've said before, a lot of that is going to hit in '24 and beyond. We're still in the early innings of many of our systems transformation that I pointed this out before, we're rationalizing 260 systems across the company. So all of that is still in the pipeline. To your point, where is this coming from, it's the same point that I've made in the past. Really just looking at what's in the system, we have a very significant cushion in terms of the overall savings amount tied to all the initiatives that the company is working on. And then just looking at how those are flowing through the implementation milestones. And I have full confidence now that we're going to get $5 billion or more. And we'll continue -- again, this is not an integration exercise. It's a transformation of the entire operating model for the company. And yes, we're going to be reinvesting some. We actually have reinvested some. If you look at the numbers, I said $2 billion have flown through in the first half of the year. We've obviously not grown profits by $2 billion. We used some of that to offset the tougher macro environment and we've used some of it to fund the investments everywhere in the company.

Kannan Venkateshwar:

Maybe one question on free cash flow. I mean the cash flow numbers are obviously very impressive for the quarter as well as the guidance for Q3. So Gunnar, could you help us understand the working capital tailwinds I mean the sources of those? And as you look beyond this year, to what extent can you keep harvesting that cash flow? And as you get to next year, you obviously have the cash cost going down of integration and then you have interest costs going down but then you have offsets potentially in the form of advertising or programming costs going up and DTC getting back to growth. So could you talk about those trade-offs as you look beyond this year in terms of free cash flow growth drivers and what they could look like in '24?

Operator:

Your next question comes from the line of Brett Feldman with Goldman Sachs.

Gunnar Wiedenfels:

Okay. Well, let me start maybe and then pass to JB. As I laid out a minute ago, I do think that advertising for our D2C platform is a massive opportunity. I mean you see that we're growing advertising 25% in the quarter on the platform and that is in a challenging market environment. And in fairness, we haven't really started prioritizing this. And as I laid out, for the first time ever, advertisers are going to have access to some of the best shows in the entire landscape. And we're opening that up. We've got the technology in place and it's definitely going to be a growth priority, especially since we know that, in many cases, we can generate higher ARPUs on the ad-light platform or offering then on the subscribers [ph].

Operator:

Your next question comes from the line of John Hodulik with UBS.

David Zaslav:

Thanks, John. First, when it comes to our sports rights domestically and globally, taken as a whole, we're money good. So we have good deals with -- here in the U.S. and around the world that are -- that provide real value to us. One of the elements of those deals is that we own the digital rights to our sports. So we have the ability for no incremental cost to put that content on our platforms. And we're doing it in Europe. We're doing it in different ways. In some cases, we're doing it as an incremental tier. And in some cases, we're putting it on the entire platform. And we've been at it now for about 1.5 years or 2 years and it's pretty compelling. I've talked about news and sports as our artillery and a real opportunity for us. So we'll be coming to you guys soon. We've been working this summer very hard. Number one, we wanted to get this platform right. We wanted to do no harm. Let's get a transition. There was a fair amount of overlap. And we've got the transition; the platform is working exceptionally well. Consumers are very happy. Engagement is up. One of our thesis of having how well this overall mix of content will work. Directionally, it's very -- it looks like it's working. More than 20% of the viewership is going to some of the more diverse content in different time periods. We still have a lot of work to do. We're early on. But news and sports are important, they're differentiators, they're compelling and they make these platforms come alive. And that's -- if you're on an SVOD platform and something that's going on in the world and you could see it, it has that platform -- makes that platform really alive. So you will hear from us on that soon.

David Zaslav:

I think how everybody determines we're focused on how we're going to use our sports domestically and globally to create more shareholder value and stronger economics and help the leagues who all are very interested in reaching more people, more demographics. And so that's our focus. And in addition, as you know, we have Bleacher which is the -- and House of Highlights which are a huge funnel for us and a big opportunity. And we're focused on how we use that in tandem because it is the largest platform for people under 30 in sport.

Jessica Reif:

Just on film, maybe just to go a little deeper. I mean Barbie was so outstanding. So are there lessons learned from having original IP and -- like brilliant marketing. How does this shape your film strategy going forward? Can you talk about the impact to Max when it hits the platform? And then I guess, also in kind of the studio segment but you talked about selling to third parties which obviously makes a lot of sense, have you seen any change in demand given the strikes? Or can you just talk about overall demand for your content?

Jean-Briac Perrette:

Yes. I mean, Jessica, as you films, obviously movies, continue to be a very important part of the Max offering. I should remind people that in the U.S., obviously, we're particularly more reliant on the Warner slate. Outside of the U.S., we are a multistudio service still, including the Warner slate. But film are incredibly important. And I will say what we've seen so far is -- obviously, we sort of benefit on Max in both ways. Even content -- even the titles that don't necessarily perform as well as we wanted to them in the box office, by the time they get to Max because fewer people have seen them and they are newer to more people, they do well. And the bigger titles like we had in Batman last year or doing when it came to the service and we expect the same of Barbie that do incredibly well, people want to resee it. And so it continues to be incredibly important part of the business.

Operator:

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

David Zaslav:

Thanks, Ben. Look, the market is -- it improved a little bit last quarter and we think it feels like it's improving a little bit this quarter. We're seeing some more improvement, not anything great but we're seeing some more meaningful improvement outside the U.S. But this is unusual. In my 35 years, I think a lot of us expected that there would be a -- that we'd see a meaningful recovery in the second half of the year and we haven't seen it. And we've needed to figure out how to make up for that. We just came out of an upfront that is encouraging, at least for us. We're seeing mid-single increase on the sports side. We got price increases with some of our affinity networks. Some of these networks are really important to advertisers and we're still doing a lot of original content which makes us unique. And some of our smaller networks were slightly down. Max was the star. I mean a big star, as JB said, some of this content, the greatness of HBO and Max, the KC, all that content, that we have 127 Emmy nominations, the idea that you can get in front of Succession, you can get in front of the highest quality content for the first time. And it's very uncluttered. It's one spot right for now on the front end of it and some of the older content is limited. And so we're seeing really good pricing. We can't say one for one. We need to build up Max for now. It's -- there's a huge demand for it. We're going to be pushing for -- as we look at growth everywhere, we're going to be pushing now for how we reduce churn and grow Max. But it's very helpful to us that we have a significant digital footprint. We have a really strong product in Max. And look, for us, we can't predict what's going to go on with the linear business. But we have a lot of command and control, as I talked about earlier. And the viewership on our platforms are actually quite strong, it's just that they're older. And there's a load of people still loving and watching our content. And most of our content now is going over to Max. So they're watching Diners and Dives and then we're getting -- we're monetizing it again to all of our subscribers on our ad tier and around the world. So we have that symmetry. We need to build up the other side. But we've been very aggressive and we will continue to be about driving the margin. And we're aware that there's a decline in the traditional business. And we're fighting to keep that free cash flow and we'll pull every lever we can.

Michael Morris:

I want to ask one about the strikes and one about the international business. First, on the strikes, David. From the outside, it does feel like the 2 sides are very far apart. And so I'd love to hear if you could characterize how far apart you feel that the sides are, recognizing that you're being negotiated on behalf of but your interests are obviously very much at stake here. So I'd love to hear just sort of your thoughts on how far part the sides are and how influential do you feel like you can be on bringing sides together. And then second, on the international business. You made constructive comments about the opportunity there. Obviously, your international business has a pretty big mix of brands and partnerships, licensing arrangements. So can you maybe talk about the strategic vision here? Is your ambition to have one strong single brand over time, similar to the way Netflix is structured? And maybe more tactically, what are some of the milestones or initiatives over the next 12 months that you're looking to achieve?

Jean-Briac Perrette:

And then, Michael, as it relates to international, certainly on the streaming side, we will be moving to one unified consistent brand with the launch of Max over the next 12 months, with the rollout plan for LatAm, EMEA and then APAC. So absolutely, over the course of sort of the next 12 months, that's the road map and the plan we're on. I think the second piece is we're obviously excited as we think about content mix, particularly in an environment where, to David's point about the strike, we do have great original productions happening outside the U.S. as well, both for Max as a platform as well as our local networks and that content will feed Max as well. And so the mix of powerful global IP and global content coming largely out of the U.S. as well as local content produced by our local teams in markets, particularly in Europe and LatAm, that mix to drive penetration of Max outside the U.S. we think is very powerful. And then on top of that, we have, obviously as David alluded to earlier, our sports. And as we think about Europe, in particular with the Olympics and in coming home to Europe next summer, will be a great launch platform for us in EMEA.

Philip Cusick:

Congrats on Barbie. I'm excited for Shaq and Charles to discuss a Barbie-Superman team up, that would be great. Following up 2 things. Following up on John's question, it sounds like NHL is coming to Max and we should think about Max as the path for more of your Turner Sports over time. How does that impact Max pricing? Can you put those sports on and keep prices around this level? Or do you think we need a substantial increase to get there? And then second, on lower DTC churn in the quarter, was that driven by, I think you mentioned -- what's the remaining discovery HBO overlap, that's sort of latent churn? And what do you see in the pace of that consolidation going forward?

Jean-Briac Perrette:

Yes. I mean I think as David alluded to earlier, in sports, we have a mix of models today across. Largely in Europe, it is priced in an incrementally priced tier. In LatAm, we have some sports bundle, a mix there as well. We have some local football or soccer in a separately priced tier. We have Champions League in Mexico and Brazil, priced within the entertainment offering. I think generally, our view is sports is a such a premium offering with a very focused and passionate fan base. But generally, the model will require some way to find -- need to find incremental value to get out of it. And so exactly how that comes to market, we will have more to say later in the year. But generally, our view is that it needs to be monetized incrementally, let's put it that way. And then as it relates to the overlap, I think as we said publicly before, we had -- we estimated about 4 million global overlapping subscribers between d+ and HBO Max at the time, with a large portion of that in the U.S. In Gunnar's remarks, he talked to the fact that we've now seen several hundred thousands come out of that in the U.S. And we will continue to presumably to see some further tailing off that overlapping sub base but it has been materially less than we expected. And so that's the story on the overlap.

David Zaslav:

We're going to talk about news and sports. We'll be back to you soon on that. And one of the things you're also seeing with us is we're winding out a very -- there were some low ARPU deals that were -- internationally that we just looked at and we just said, that's not who we are, let's get out of those deals. And so there has been a focus to say let's focus on profitability, let's focus on really good subs. Real value, the economics that we get. The ability to nourish our audience and build on those economics, that's our future. And let's get out of these deals that were bargain basement and providing very little ARPU of value.

Andrew Slabin:

Good morning and welcome to Warner Bros. Discovery’s Q1 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I’d like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance. These statements are made based on management’s current knowledge and assumptions about future events and 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 factors that could affect these expectations, please see the company’s filings with the U.S. Securities and Exchange Commission including, but not limited to the company’s most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q1 earnings release trending schedule and accompanying slide deck is available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

Gunnar Wiedenfels:

Thank you, David and good morning. On balance, I am very pleased with where we are and very encouraged by the progress of our priority initiatives, which are all moving forward as planned. We generated 12% constant currency EBITDA growth this quarter a strong starting point for the year and also the first quarter of EBITDA growth since closing the merger. I remain confident in our guidance of adjusted EBITDA in the range of low to mid-$11 billion and one-third to one-half conversion to free cash flow, with net leverage at the end of 2023 comfortably below 4x. As always, there are a number of moving pieces and this quarter is no exception, so I’d like to address the key puts and takes impacting our results and outlook. Starting with D2C, as we enter this next leg of the journey, kicking off with the launch of Max on May 23, we are already very pleased with the traction we are seeing, having generated $50 million of EBITDA this quarter. Perhaps more importantly, we are continuing to see improvements across key operating KPIs, such as in our retention metrics. We also added 1.6 million subscribers globally in part due to the strong creative success of The Last of Us. We have driven a healthy amount of lasting efficiency improvements across this business through the initial phase of D2C integration. In fact, D2C operating expenses were down over $760 million or 24% excluding FX on a pro forma basis in the first quarter. All of this now provides much greater clarity on the path forward to establishing a sustainable platform setup for dynamic and profitable growth for years to come. As we relaunch here in the U.S. and plan additional launches later in ‘23 and into ‘24, we will continue to be guided by a focus on prudent and rational investment. Additionally, we have benefited from greater insight into the efficiency and effectiveness of our marketing efforts over the last 12 months and we have seen that we can do more with less. As JB noted, during our precedent, we will undertake the largest marketing campaign in the company’s history to support the launch of Max. This was of course anticipated in our internal budget and guidance. We will continue to focus on driving efficiencies throughout our D2C non-content cost structure as we launch Max around the world and get more and more of our digital products on a common platform. As such, we expect the D2C segment to continue to show improvements with peak EBITDA losses for the year in the second quarter. And when I say peak, I am talking around $300 million or so. In fact, we are tracking ahead of our profitability target and now expect to be profitable in the U.S. on a full year basis this year. That is a full year ahead of our original plan of breakeven in 2024. And I remain ever confident in our outlook of generating $1 billion or more of profitability in 2025 globally. Finally, I’d like to remind you about the approximately 4 million overlapping subscribers between HBO Max and Discovery+, consistent with what we outlined for you last summer. While we intend to keep Discovery+ going as a standalone product, we expect a large portion of these 4 million subscribers will likely churn off Discovery+. The exact cadence of course being unclear at this time, but we do expect a fair amount of it to happen in the first few months after launch. Turning briefly to the other segments of our portfolio, starting with the advertising market. As expected, we did see a modest sequential improvement in Q1 when adjusting for the Olympics. And we do see this underlying trend continuing into Q2 on a like-for-like basis. That is after accounting for the NCAA Men’s Final 4 last year and the Stanley Cup finals this year, which combined will account for a net 200 basis points headwind to Global Networks advertising revenues. While we see this as encouraging, visibility remains limited and the improvement is gradual. Though the market remains challenged, we are cautiously optimistic, particularly coming into the Upfront, which will take place over the next couple of months. With discussions ongoing, we will soon have a much better handle on Q4 in the 2023-2024 season. We see a particularly strong advertising opportunity on Max, both with respect to the more traditional ads on shows like Friends and Big Bang Theory as well as the very impactful and high-profile opportunity on Max Originals. You will hear a lot more about this at our Upfront presentation in a few weeks. Recall this really only kicked off in February and we are moving slowly and deliberately ensuring a high-quality, rich advertising experience and we see significant further upside for this product line, particularly when the advertising market improved. Briefly on our international markets. On the whole, they continue to perform relatively better, led by key markets like Poland, the Nordics and Italy, with the UK, Germany and Brazil on the weaker side, though as in the U.S., there is limited visibility. In the Studio segment, there are a number of moving pieces that will be helpful to unpack. Obviously, Hogwarts Legacy was the key driver here, having performed amazingly well. It is thus far the best-selling game across the industry with over $1 billion in retail sales and it is on track to be a top game for all of 2023. Studios results were however negatively impacted by disappointing box office performance and this was exacerbated by a very difficult comparison against the success of The Batman last year. Similarly, TV licensing revenues declined year-over-year against certain large deal in Q1 of 2022. As David mentioned, we are coming up on the 2023 summer slide and early reviews and tracking for The Flash, premiering June 16 and Barbie on July 21, look very promising. Both titles have enjoyed major buzz and we are leaning in. Keep that in mind for the second quarter when the Studio segment will see the expense associated with these marketing campaigns, while the revenue opportunity largely impacts Q3 and beyond. Now, let me provide some color on free cash flow, our financial North Star, as you know. As a reminder, free cash flow of negative $930 million in Q1 of this year is not comparable to the positive $238 million reported last year, as the latter represented Discovery as a standalone company. And while our first quarter free cash flow was negative, as guided to on our fourth quarter earnings call, we have made significant progress with strong improvement versus the underlying trends in the prior year when WarnerMedia had heavily negative free cash flows. A few additional key factors to keep in mind. First, Q1 for both legacy companies has always been the seasonally weakest quarter in part due to the cadence of the production schedule over the year and the timing of certain payments, such as for sports rights. Second, Q1 and Q3 carry the additional burden of the semiannual coupon payment in large part for our merger bonds, an impact of over $800 million included in our Q1 free cash flow. Lastly, Q1 also contains significant and expected cash out from restructuring and integration costs, close to $500 million during the quarter. Given the quarterly puts and takes, I’d like to point to the trailing 12-month free cash flow to give you a better sense of the true run-rate. Our trailing 12-month free cash flow is now at $2.1 billion with a very clear path to our guidance range. The key drivers for the balance of the year are

Doug Mitchelson:

Thanks so much for taking the question. David and JB, I think most interesting, how would you define success for the launch of Max or the relaunch of Max, as you want to define it? I think there is a lot of discussion in terms of choosing Max’s brand and the need to build that or rebuild that. David, you mentioned actively trying to include news and sports in the lineup, and so I’m just curious whether it’s engagement, whether it’s subscribers, whether it’s ultimate profitability, how should investors think about what to expect for Max in the coming quarters? And Gunnar, I think you made some strong statements in your prepared remarks, but obviously, a lot of investor focus on free cash flow generation and balance sheet here. And I guess the just general question is what’s your level of confidence in the balance sheet targets over the next couple of years and what gives you that confidence, especially with the year being back-end weighted? Thanks so much.

JB Perrette:

Yes. I think, Doug, just to add on to David. I think in the very near-term, migration success is sort of one key metric, getting the customers who are on HBO Max today successfully migrated over to Max. And then over time, there will be three other metrics and a fourth that will come. The three would be brand awareness. Obviously, we’re building a brand with Max now that is new that has a different proposition, a broader proposition for something for everybody in the family. Number two, customer satisfaction. Number three, engagement. As we talked about on the April 12 event, a lot of it is around seeing all this content coming together, and the breadth of the proposition driving higher utilization, and therefore, helping retention. Those, I think, are the core ones in the initial few months. And then over time, obviously, as that flywheel continues, we obviously want to see subscriber growth and scale as the additional metrics. So those are the ways that we will look at success.

Doug Mitchelson:

Thank you all.

Robert Fishman:

Hi, good morning. I have one for David and one for JB or Gunner. First, David, can you expand on the strategy you mentioned in your prepared remarks and maybe the financial benefits of licensing your HBO and Warner Bros. library content internationally, some of the deals you discussed? And how do you balance those licensing deals with your ambitions to scale Max outside the U.S., if and when you choose to launch in those markets? And then for JB and Gunnar, on DTC, anything you can share about the DTC retail versus wholesale trends? I noticed the wholesale revenue dragged down overall DTC revenues, and just whether that wholesale pressure should continue throughout the year? Thank you.

JB Perrette:

Robert, I’d just add to what David said, there is two filters as we look at it. There is the strategic filter and financial filter that David just talked about, which obviously is preeminent, which is a market like India. If we don’t believe we can be profitable as a streaming service within a 3 to 5-year time horizon, at the end of the day, right now, that’s not going to be our priority focus. And so if the opportunity is to license and take a bunch of money off the table to help support our growth initiatives in other markets where we think we can scale more profitably and more effectively, we do that, number one. Number two, there is a practical reality that some of these licensing deals are done in markets where we’re just not going to be ready to launch from a platform perspective. As David mentioned in his prepared remarks, we’ve got a timetable to roll out our new product and convert and migrate our existing HBO Max customers over the next 12 months plus, then some of these things are going to take into ‘25 and even beyond to launch in new markets for our platform to be ready. And so in the meantime, it just makes perfect sense for us to take as much money off the table as possible. And so that’s the thinking.

JB Perrette:

And we have – sorry, one other thing I’d say is in all these deals, oftentimes, what we’ve done, which is better than what we have in existing licensing deals, is ensuring that when those deals expire, we have stronger cliffs for the content to come back. So we can actually – when we’re ready to launch, if we assume we’re going to launch in those markets at the end of those deals, we get more of our content back immediately.

David Zaslav:

Great. Next question.

Steven Cahall:

Hi, good morning. Maybe first, David and J.B., on DTC profits that are tracking ahead. Just curious what’s performing ahead of your expectations there? Is it the subscribers and revenue? Is it more about the cost reduction? And I know you’re new into the Max launch domestically, but I’m just curious if you’re seeing legacy HBO subscribers, which I think, David, you were talking about on CNBC this morning, if you’re seeing those folks engage with the Discovery content, it’s kind of different genres? But I know that’s the hope, so just wondering what kind of early trends you might be seeing there. And then, Gunnar, on the adjusted EBITDA guidance for the year, I think it still implies low, $11 billion. From your comments, it sounds like the macro is still a little tough, but you’re bullish with the incremental U.S. DTC profits. So I’m just wondering, with DTC performing better and no change to that guidance, is there anything that’s performing worse? Or is that better just kind of in the range as we think about all those different components? Thank you.

Gunnar Wiedenfels:

Alright. Let me start with the guidance quickly, because you’re right, obviously, the DTC point is the big, big positive driver here. The most important point, as I laid out is we have very clear visibility into our transformation initiative and the impact that’s going to have on the cost base. Also for the Studio, definitely a support here for the second half of the year, a very strong summer slate that we’re really looking forward to launching, and the revenues that those are going to hit from Q3 onwards. Again, I don’t want to speculate about the linear business, but remember that the comp in the second half is going to be much more beneficial because especially the fourth quarter last year was pretty anemic in the scatter market. And – but at the end of the day, we still have a lot of shots on goal here. And it’s a hit-driven business, especially on the studio side, that’s why we’re giving the range. And I feel comfortable with that range with what I know today.

JB Perrette:

Yes. Steven, to echo what David said, we’ve seen it across multiple metrics. We’ve seen it across retention, as David rightly pointed out, we’ve had in the first few months of this year, record low churn on HBO Max.

JB Perrette:

It’s still high. But we’ve been...

JB Perrette:

Yes. And as we’ve talked about at the April 12 event, that was all done through a kind of, what I’d call, a slightly more analog attack plan – we’re now getting to a tool and a platform as we launch Max that we think has a lot more ammo to be able to actually attack churn in a more aggressive fashion. So we think we’re just at the beginning of that upswing. The second is we obviously had price rises in the U.S. as well as a few of the Latin American markets. And the reality is the great news there is we’ve seen much better reaction and much better retention as well on ARPU increases in those markets. And so that’s been a positive. We’ve seen efficiencies in – across the board in some of the items that Gunnar talked about. And then obviously, over time, we’ve seen some scaling, but we’ve been measured in our scaling. And so that’s been great. And as it relates to the content cross-pollinization, the reality is we’ve done very little so far. But we have done stuff with Magnolia, for example. And as you heard us, I think, hopefully talk about before, it was a top 10 performer on the service at launch, and even a top five in the initial week of launch. And so we feel very positive about what that means. And as we’ve cross-pollinated content outside of the U.S., we’ve seen similar trends of great reaction and reception from HBO Max consumers to the Discovery+ content. So when we go full throttle with it when Max comes together, we feel very optimistic.

Steven Cahall:

Great. Thank you.

Peter Supino:

Hi. Good morning and thank you. On the subject of free cash flow, adjusted for one-time charges, you mentioned that the last 12 months, the company had produced a little over $3 billion of free cash, adding that 1-plus of one-time charges to the 2-plus of underlying. If your expectation is that synergies will contribute $2 billion in ‘23, it seems like your free cash flow has an easy path to $4 billion, which is within your guidance range. I am wondering if you would add any significant puts or takes to that analysis. And specifically, is the DTC upside that you described today, the idea that EBITDA will be $1 billion better than previously expected in ‘23, incremental to the math I just laid out. Thank you.

David Zaslav:

We were the – I think we were among the first to say that the advertising market was facing – was starting to be challenging. And so we have been pretty careful in projecting because you can’t, how an advertising market is going to turn and when it’s going to turn. And so for purposes of how we looked at this year, the market is quite challenging. It’s improved a little bit, but it still remains a really challenging environment. But the good news for us is we built that into our projections for the year and into how we talk to you about what this – what we will face this year and how we will perform.

Operator:

Your next question comes from the line of Bryan Kraft with Deutsche Bank. Please go ahead.

David Zaslav:

Thanks Brian. We have a very good gaming business, with 11 different studios and a real talented capability. But the real differentiator for us as a company is we own our IP. And that IP belongs to us, and we are developing it. In some cases, we may decide to develop it with the third-party game technology company. But we may be the only media company that owns, whether it’s the DC Universe, Harry Potter, all the content that we own, Game of Thrones, that’s for us to deploy. And I think that’s particularly strategically important. Because if you look at Hogwarts Legacy, a big piece of the success of that game is you go into it. If you are a player, you go into that game and you are in that world, that’s kind of a new concept. Before it was really – it was gaming and it was storytelling. And now, I don’t – it’s very difficult to figure out what anyone’s definition for the metaverse is. But when we launch a product as a motion picture or a long-form story on Max or HBO, and then we have a game, that game belongs to us. But now there is this Tweener, which is it may be in the next couple of years that we launched our Superman movie. And then people spend more time and there is more economics of people just hanging out in the Superman world and universe. And the fact that we own all that is something that I think is going to be really important as we look for – whether with – as technology develops and given the amount of time people spend on gaming, we don’t want to be in the motion picture and story and long-form storytelling business and have somebody else in the business of hanging out in those worlds, because those worlds, I think are going to be quite profitable in the years ahead.

Gunnar Wiedenfels:

And the margin profile, Brian, is not going to change materially. We will be a little lighter on marketing. Obviously, retail price points are a little lower, so from a gross margin perspective, a little bit of a headwind, but no material change.

Operator:

Your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities. Please go ahead.

David Zaslav:

Yes, Jessica, there is – when we look at this business, you are exactly right, we reset the business for the future by looking at each company and saying what should this come – how should we be structured to have the best chance for sustainable growth in the – today. We took out a lot of layers. We built the new leadership team, but we still have a lot of the benefits that will be flowing through this year and next year. And we are still finding – we are still opening up some closets and stuff falls out, which I think is a good thing, more opportunity. And we have got some businesses that aren’t doing well. Warner Bros. turns 100, and they have had two of the worst years of – if you look back at Warner Bros., it was really just very difficult. Very difficult on every level in terms of what was turned out. And so we think we have turned the corner on that. We have got a very strong leadership team in place now. We got James, Gunn and Peter working very hard on DC, which is going to be a very big growth driver for this company. And so we are very bullish on DC. And the Superman script first draft is done, Gunn is – he is on the Mission from God. And I think it’s a really good moment for us to prove out on DC, what we got and how strong it is globally for long-term sustainable growth. We got some more movies coming up that are better. We have been working hard on fixing them and enhancing them and investing. We said no movie before its time. And with Barbie and Flash, we have two very good movies, June 2, very strong. And so I think the slate coming up now, that will make a big difference. We have lost a lot of money in the motion picture business and making that turn is important. Continuing to build on Max, and we haven’t done much with animation at this company. We own Hanna-Barbera, Looney Tunes. The – if you take a look at animation, it’s a critical – we have three animation studios and we don’t have a lot of production in terms of – it’s not productive in terms of free cash flow. It’s not productive in terms of market share. It’s not productive in terms of growth. And so driving that, and we now have a really strong leader. Our leadership team is in place. This was Formula One and we are dealing with a very difficult environment, and it’s raining and the track is wet and it’s a challenge. We have got a leadership team of racecar drivers here, in every case. And so we have got a lot of confidence in Mike and Pam on the Warner Bros. side. And the games business is just getting started, which I think is something that people didn’t really pay a lot of attention to. And maybe the most important portion is the fact that we have this great diversity of assets. It’s hard to predict what’s going to go on. But we have restructured this company now. We are really tight. We are really tight and we are continuing to figure out how do we drive productivity so we can invest more in storytelling. That’s all we do. And right now, it’s sort of – the environment is challenged, challenged, challenged. But as things start to pick up, and they will, in different areas and we can’t predict exactly when, you are going to see a very quick turn at this company. So, the idea that we can end this year, drive towards – to be less than 4x levered with a very tight cost structure, with command and control of this business, with strong brands that people love around the world, and then all of a sudden, things improve a little bit, and you will see an acceleration.

David Zaslav:

The NBA. Look, I just saw Adam two days ago at the Nick game. Go Nicks. Big night at the Garden. Wow, I have been waiting a long time for that one. And – we are doing a terrific job with the NBA. When you look at Barclay and Ernie and that team and Shack, the programming we were putting on, we are setting records with the NBA. We are setting records with hockey. We also have March Madness, where we did very well. We couldn’t do as well with the marketplace because sports is relatively strong, but sports used to be strong enough that it was also able to help you with the rest of the business. And that was happening for a long time. And the market was just quite soft, and so we are able to take advantage of the sport, but we weren’t able to take advantage of the piggyback halo. And I think that’s true in the industry. It just got more difficult. But between baseball playoffs, March Madness, hockey, we have long-term deals that are quite favorable to us. We like the NBA. The deals coming up in ‘25. There is lots of ways that could be re-conjugated. We did a very favorable deal in the UK with our BT Eurosport business, where we ended up with 90% of the football – the soccer games and Amazon got less than 10% of the Champions League games. We produce that content for Andy Jassy. And they promote to us, we promote to them. And the economics of that deal were very favorable for us. And so there is lots of ways to re-conjugate it. We like the NBA. We hope we can get there, but we are going to be very disciplined. We work very hard to build this company to drive profitability, to have a strong balance sheet, to provide real growth and real free cash flow. That’s the long-term sustainable nature of this great company, and we are not going to jeopardize that for any piece of IP.

David Zaslav:

When we talk about a marketing campaign, one of the things to bear in mind is we are using our platforms now. That wasn’t happening in – we are really hyper focused. As I have said, on many nights now, we are getting 48%, 45%, close to 50% of all viewership, broadcast, cable. On any given night, we have 25% to 30% of viewership on the platform. And using that, using Bleacher and House of Highlights, which has a very young demo, using cnn.com. So, yes, we are – the campaigns are bigger. But we are one company, and so the ability to promote on HBO and our own platforms is a big savings. It’s a big savings for us internationally, and we are deploying it.

Operator:

Your last question comes from the line of Matthew Thornton with Truist Securities. Please go ahead.

JB Perrette:

Yes. Thanks Matthew. Just on the migration point first, a couple of things. Number one is, remember, there has been no change in the billing process. So, as it relates to revenue, there is no change and there is no migration as it relates to billings. So, revenue and billing continues to be exactly the same irrespective of whether somebody has actually “migrated”, i.e., accepted the new app or downloaded the new app if they need to. Number two is, as we said at the April 12th event, there is a large portion of the base that we will have to do absolutely nothing, where the app will automatically convert. And upon streaming again, you will have accepted the terms of use and you will be off and running. For the portion of the base that actually has to download the re-download, we have done everything we can to make it as seamless as possible, including not having to input – basically be two clicks to get to the – to streaming again your video content. You have no need to – your user name, password will be migrated, your watch list. All your history will be migrated. And so we try to make everything as possible. Now, inevitably in these processes, you are going to find some friction. But we think it’s fairly limited in terms of the subscriber risk associated to the migration. And so we feel very good going into it. We have tested it. We are all ready for the migration. And the flip side is on then switching to the Discovery+. As Gunnar said, we do see about 4 million subs largely in the U.S., but there is some of that internationally as well that overlap between the two services. And obviously, we are going to be doing everything we can to up-sell those that are not subscribed. But as we said again, the flip side is we are not going to be too in their face about it. At the end of the day, if people want to stay subscriber of Discovery+ and that’s the environment they prefer, that business by itself is profitable and we will continue to maintain it and serve them there. But we will over time, initially through marketing efforts, try and see if we can get them to come in and sample it. We will have offers that incentivize them to sample it for some period of time at favorable economics. And we will see how successful we can be in upgrading them. Oh, on FAST. So, look, on FAST, we always believe in a – what we call, a hybrid strategy, which is ultimately, first and foremost, kind of what we call channel syndication, which is ultimately, we realize that the platforms and the distributors out there, there are many who have the scale and the size, and we want to get our channel portfolio out there and viewed. And since it’s an audience aggregation and advertising business, we have already gotten out with Roku and Tubi. And we have been very pleased with the initial success with a very small, but a handful of channels that were out there already. We will continue to look to see if we can increase that volume, to your point, for a second, third, fourth monetization windows for certain content. And then we are continuing to explore the owned and operated strategy. And at some point in time, longer term, we do see this opportunity for this WB TV brand and platform to exist in an owned and operated environment. I think at some point, that will be dovetailed with the state of the advertising business and we want to make sure we come to market at the right time when the demand is sufficient. But we will continue to execute this hybrid strategy of syndicated channels initially. And then over time, at the right time, launch our own service.

Operator:

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your lines.

Andrew Slabin :

Good afternoon, and welcome to Warner Bros. Discovery's Q4 Earnings Call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and 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 the company's filings with the U.S. Securities and Exchange Commission, including, but not limited to, the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q4 earnings release, trending schedule and accompanying slide deck is available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

Gunnar Wiedenfels :

Thank you, David. The fourth quarter marked the end of a first and very defining chapter for Warner Bros. Discovery in which we took some pivotal initial steps. Among them, the integration and repositioning of our global finance organization through which we implemented a number of initiatives to drive efficiency and better support the company's long-term sustainable growth. We've accomplished a significant amount in 2022, and I'd like to take this opportunity to thank the entire finance team for their persistence and resolve in working through these very difficult but necessary first steps, which has resulted in greater command, control and precision across the enterprise and laid the foundation on which we are positioning the company. This is in part a function of a successfully executed synergy program and ongoing continuous improvement efforts. With respect to these initiatives, we are working on a total potential opportunity of $5 billion over the next few years. That is what we're tracking in our system today, specific initiatives with associated direct financial impact, responsible owner and detailed milestone plans. Naturally, and as I have said before, not all of these initiatives will come to fruition or get realized to the full extent, but this represents a significant pipeline for us as components of both near-term cost out and longer-term continuous improvement. And to that end, we are now confident in a path to at least $4 billion of savings largely addressable through 2024, representing an increase of $500 million over our prior estimate. Through the end of 2022, we've already realized over $1 billion of synergy, inclusive of a couple of hundred million dollars of course-corrective measures that we undertook early after launching Warner Bros. Discovery in April last year. We are laser-focused on delivering against our high-level strategic, operational and financial targets, and the three pillars that comprise our core principles. And as we look to 2023, my near-term key financial priorities remain

Jessica Reif Ehrlich :

So David, as you said, '22 was a year of really heavy lifting and you had challenges really in every division, whether it was film, advertising, CNN, et cetera -- I mean, macro, et cetera, D2C. As you look out to '23, I think Gunnar kind of touched on some of the potential tailwinds, but it sounds like you're walking away from close to $12 billion in EBITDA to maybe low to mid-$11 billion in EBITDA. I'm just wondering if you can talk about some of these assumptions. Clearly, you still have some macro challenges, but what could go right? What's in there for upside, which is something that you didn't really talk about that much, but it's new? And on the potential for the balance sheet, the balance sheet improvement is very encouraging. Does that include any potential asset sales like nonstrategic asset sales? You have so many hidden assets within the company. Is there -- what are you considering?

David Zaslav :

Non-strategic…

David Zaslav:

And we hit this year with a full leadership team in place. We met with 186 of the top leaders in -- for a week in early January. This is one team now. Everybody has a strategic focus on improving free cash flow, market share for each of the businesses. We have command and control of each of the businesses. And I think our diversity, we have all these different assets that have -- that are different. Some are advertiser-driven. The gaming business is all consumer product driven. And I think that diversity is strength.

Michael Morris :

Appreciate all the information you just shared. I'd like to ask about advertising trends you're seeing and maybe kind of advance this discussion a bit more. Really trying to understand how much of the ad impact that you're seeing is kind of coming from the macro environment? How much do you feel like is more reflective of some of the underlying trends that just have to do with ratings declines or core cutting and those types of trends? If you could share your view on those two impacts, that would be very helpful. And my second question is about this pending relaunch MAX product. Is there any of your content that's definitely off the table to be included in that service? And so I think of the investments that you make in live sports content on Turner, live content on CNN, are those types of things definitely are or they structurally not able to be put on the service? Or is that something that might fuel that service?

Jean-Briac Perrette :

No. I think the focus right now is obviously continuing to on the expanded entertainment offering, and we think the complementary of the HBO Max and Discovery+ entertainment offering is significant and will be a major step forward for consumers, who are looking for simplified number of choices, more breadth of options in terms of content all in 1 place and for good value. That's what we're looking to primarily deliver. But as David said, we've got sports and news that today are really untapped in the streaming world, and those are optionality for what we might be willing to do in the future, and we'll share more of that on the 12th with you with more detail.

Gunnar Wiedenfels :

Yes. No, the only thing I would add is from the perspective of cyclical versus secular, there's no doubt. I mean, pot levels in the industry, I think, were down 14% in the quarter. Arguably, we've done a little worse than that, partly driven by the scheduling or the sports schedules that David mentioned a couple of minutes ago. But I also think we're very well positioned to grow from here. Kathleen is doing a lot of work, getting the enormous value of our library on screen. We've got some tests going on and it's very early, but some of the numbers that are coming in are looking exciting. She's also restructured the team with development-focused doers, who are running this portfolio as one integrated portfolio. And we've got a time-tested approach to cross promotion, and we're adjusting that right now to the larger portfolio and the larger number of assets that we're promoting. We were able to put that to work behind some of cases launches, behind some of our film launches. And we're seeing some real opportunity here. So I think we're very well positioned. In terms of the market itself, it's -- as I've said before, it's not a good environment. We do see the weekly bookings right now ticking up slightly if you compare January and February with maybe the November, December timeframe, looking a little better; retail, fast food, entertainment, a little better; telecom, small, but coming back; but then you've got other areas like technology is still completely depressed. So again, as I said, a similar picture with more diversity. International, some areas actually trending up now, others still difficult. It's just too early to really call a trend change here.

Gunnar Wiedenfels :

Yes. We're assuming that. And I have no doubt that when the market turns, we're going to be in a very, very good position to capture that upswing as well, especially, as David mentioned, with more inventory on the digital side becoming available here, which last year was sort of a limiting factor for us.

Brett Feldman :

There's been an increasing discussion recently about what the right general entertainment content strategy supposed to be for media companies as your models continue to pivot and become more streaming-centric. We've heard the word curated. I think you used it during your script. You also hear a bigger discussion around how you decide when something should be exclusive to your platforms and when maybe you should be licensing. So I was hoping you could just give us your most updated thoughts, so we kind of have that framework for assessing the new product when you rolled out on April 12.

Brett Feldman :

In answering that question, you reiterated something you'd said before, which was an intent to fold the Discovery content into the new product. There have been some media reports a few weeks ago that you were going to actually keep Discovery as a standalone product. Is that something you're able to comment on now?

Gunnar Wiedenfels :

And Brett, just to be clear, the Discovery content would still be available on the bigger relaunched combined product. No question about that.

Benjamin Swinburne :

Two questions. David, if James and his DC strategy is successful, which I'm sure is your expectation, what does that mean for the company overall over the long term? Obviously, successful films will help your Studio segment earnings. But -- and I know it's a tough question to put numbers around. But just as you think about the impact of DC sort of fully realizing the opportunity over the next 5-plus years, what could that mean to Warner Bros. Discovery and sort of the earnings power of the organization? And then, Gunnar, you sound very bullish and confident on the D2C targets, the $1 billion of EBITDA in '25. Can you talk a little bit about the revenue outlook for D2C? You had 6% growth this quarter, a lot of that from advertising and content, but do you need revenue growth to accelerate in order to deliver that $1 billion? Maybe help us think about the levers you have and your expectations around top line over the next few years?

Gunnar Wiedenfels :

Yes. And Ben, on the D2C question, let me start with the revenue side of it. We definitely are planning for an inflection on the revenue side. Keep one thing in mind, the entire last year was impacted by this headwind from coming off of Amazon. And we've lapped that now, and we're seeing some growth now. We will always be a little lower maybe than sort of a pure-play D2C product just because of the HBO linear trends that are baked into our revenue number. We'll definitely -- we're definitely planning for revenue improvement. And then on the cost side, all of the trends are pointing in the right direction. We see better engagement, better churn, which makes marketing efficiencies come up. We've rightsized the content investments. And we have high hopes for all of these metrics after the combined product launches to further improve. And later down the road, we're also obviously going to start looking at new market launches, again.

Operator:

Our next question SP1 Comes from Robert Fishman with SVB MoffettNathanson.

David Zaslav :

Sure. Look, the symmetry of the Discovery+ content, which is heavily viewed for hours a day, mostly during the day and infringe against the HBO content, which is watched more, Discovery+ maybe more passively, HBO, more with family, that the more research we do, the more we look at it, the more we think these fit together very well with appealing content to everybody in the family. And so we're feeling more and more confident about that. On the 12th, we'll lay out to you, we have a clear attack plan, where we'll drive this really across the country and into markets around the world with conviction. But we'll take you through what that plan is and how we intend to do it on the 12th, but well locked and loaded. FAST…?

Operator:

Our next question comes from Kutgun Maral with RBC Capital Markets.

David Zaslav :

Well, look, for us, the market right now, our focus is building a best-of-class product and putting all of our content together and so that it's easy to consume and that people are aware of all the different content that we have. I do believe, as JB said, and we do believe, as a company, that we'll sort of recreate this -- the streaming service, which is ad free, then which -- then there'll be ad-lite. And then we ourselves will run our own fast service. And so effectively, whether you want to look at content for free, you want to look at with edge, you want to look at you want a premium that we -- you would have all that opportunity with us, and it makes sense because we have the largest TV and motion picture library in the world. And we can create a Tubi or a Pluto without buying content from anybody by just being able to put it on ourselves. And so we -- as the largest owner and producer of content in the world, we'll -- we want to super serve effectively our streaming service, which is a top priority as well as an AVOD service so that we could reach everyone in every country, everywhere in the world. But in addition, we want to run this company to drive free cash flow and the ability to monetize a lot of the content that isn't critical to subscriber growth. And that isn't critical to or helpful to churn. And having some of that content appear on our platform and sell it nonexclusively to others is very economically beneficial. And the good news is we've had a real chance to look at content on each of the platforms over the last two years. And we could see, for instance, at HBO, the majority of viewership of content on HBO was only 40% of the content. So there was 60% that was hardly being viewed. And why should we need to monetize that in order to drive shareholder value. And once we establish this funnel, then we can take things like the first season of succession or the second season. We can put that down on our AVOD service. And then if you loved it, you can come up and you could then pay for on ad-lite or in subscription. And basically, we create a flywheel of our own, where we own the full ecosystem, the subscription, the ad-lite and the ad free. And we take advantage of all the content that we have.

David Zaslav :

The other point that is front or set up for us is curation. There's loads of content out there. But curation, creating content at a time when people can watch it, creating a community conversation. If you look at The Last Of Us, it was growing every week, Euphoria, to be able to deliver 20 million, 30 million, 35 million people in America watching and to have it be a conversation. Storytelling content is most powerful when you're watching it and then you're with others, either in a theater, or you're able to talk about it either online or with your friends, that's the power of content, not when you're viewing content alone. Content alone is really only half of the equation. And curating content so that people can watch it and have a shared experience is a very big piece of the Warner Bros. Discovery advantage. We can take you into the theater around the world. We can put you on HBO on a Sunday or Monday night, where it's must see streaming TV or we could have to we've launched your movie. We can put you right on HBO on Sunday night with the biggest audience in America, tuning right into you. So I think that's something that's really resonating with the creative community that their content is seen, it's curated and it's elevated and that's part of the cultural conversation, both in the theater and on the platform. And that is what all great talent wants. They want -- they want to have an opportunity for their content to be seen, to be talked about, and they want to feel respected. And that is the culture here at Warner Bros. Discovery. And the best thing that we have going for us right now is all of that hard work that we did, and it was probably two years of work that we did in 10 months, it's now almost -- it's overwhelmingly behind us. All the meetings that I've had in the last two weeks are about great content that we're producing, meeting with creatives that want to come here, how we -- what more shows are we going to be selling, what more shows are we going to be keeping on our platform? And getting ready for our new launch. So I think this is an exciting time because I think we're really -- we made some tough decisions. Some of them we may find we need to adjust, but we feel really good about where we are, and we're accelerating forward.

John Hodulik :

David, maybe just to sort of wrap up that on the content side. A number of your competitors have cut back on the total amount that they're spending on cash content in '23 versus '22. Is that -- it sounds like you guys have, on the one hand, a lot of new programs, a lot of new movies and a lot of new initiatives; but at the same time, pulling some content on the floor. Just what should we expect in terms of '23 versus '22? And then on the affiliate side, renewing 30% of your affiliate deals. I mean just how should we think of sort of pricing and how should that translate into sort of results as we look out to '23?

Gunnar Wiedenfels :

Yes. Look, I mean on the content spend, Remember, all our strategy changes leading to the content restructuring and write-offs over the course of last year, obviously, that's going to flow through cash as well as we adjust. But that said, there's always going to be a place for quality content and we're open for business. It's the backbone of what we're doing, and we'll keep investing.

Gunnar Wiedenfels :

And regarding the linear affiliate renewals, as we've said a couple of times that we're very happy with how those discussions went, is a clear testament to the importance and the value that our network portfolio is delivering to our affiliates. Taking a step back here, though, I mean, the reason why -- one of the reasons why we carved out the linear business, the network business is, one, separate segment is to be completely transparent about where those trends are moving. And as I've said before, net-net, that's not a segment where I would expect a sustained revenue growth. That's not the point. It's about the sustainability and the longevity the free cash flow being delivered by that segment. And to that point, I have no doubt that we have years and years of that coming our way.

Andrew Slabin:

Good afternoon and welcome to Warner Bros. Discovery’s Q3 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I’d like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance. These statements are made based on management’s current knowledge and assumptions about future events and 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, 2021, our quarterly Form 10-Q for the quarter ended September 31, 2022 that we expect to file with the SEC today as well as our subsequent filings made with the SECTOR. A copy of our Q3 earnings release, trending schedule and accompanying slide deck is available on our website at ir.wbd.com. And with that, I'm pleased to turn the call over to David.

A Black Lady Sketch Show:

Our unparalleled IP also allows us to grow our consumer products business and extend our characters into games, one of the fastest growing media segments with titles such as the most anticipated Hogwarts Legacy game built around the amazing world of Harry Potter and launching in the first quarter next year, and leveraging incredible IP such as Mortal Kombat, which is celebrating its 30th anniversary this year, and still going strong. On the sports side, we just resigned Ernie Johnson, Charles Barkley and Kenny Smith on multiyear deals. We've also got a long-term deal in place with Shaq. We're thrilled to have the four of them continue to host TNTs flagship studio show Inside The NBA, I believe the best show in all sports. And this further reflects our deep commitment to sports and providing fans with the programming they can't live without.

Gunnar Wiedenfels:

Thank you, David and thank you, everyone for joining us this afternoon. I'd like to start out by building upon what David said earlier, we are very pleased with our overall synergy program and the broad canvas on which we're transforming this company. To that extent, I'm now confident to commit to a $3.5 billion synergy number as we have had an opportunity to further assess our operations in more detail and refine our workstream plans. That means we're now adding $500 million of incremental potential beyond the target of $3 billion. And we are still working on detailing out the financial impact of the list of further initiatives beyond what has already been quantified. As always, I will keep you updated as these plans reach the level of detail and certainty we require for them to be included in our total synergy estimate. Regarding the actual execution of our transformation program, we expect to have realized approximately $750 million in synergies by the end of this year, and an incremental year-over-year $2 billion in 2023. From a high level and as David said, the opportunity in hand goes well beyond just a synergy capture dollar value. This is a fundamental transformation across and throughout the organization. We're refocusing on how WBD is organized, how it's managed, how the teams are incentivized and evaluated, all of which results in an ability to pivot and evolve in this dynamic media ecosystem. And we are starting to see the financial impact materialize. The 11% of SG&A reduction ex-FX in Q3 is an important early proof point. And we are on track for around 20% SG&A reduction in Q4. We've seen great traction on a number of fronts early on. First, in global marketing efforts such as with television and theatrical releases, House of the Dragon, Elvis and Black Adam most recently leveraging the broad footprint of our owned and operated media assets like never before helping to drive global awareness in a very cost efficient and effective way. Second, in content workflows, where across WBD there are numerous teams facilitating the important processes of content customization, languaging, administration of rights, participations and residuals, et cetera. Following substantive analysis, we have made the decision to centralize many of these critical functions and to harmonize the processes across the organization. In some cases, we'll collapse 10 to 12 versions of essentially the same process across the company into one best practice unlocking hundreds of millions of dollars in efficiency gains. Third, on the streaming side, the previous strategy was to build largely duplicative organizations between HBO Max, and the traditional international business. We have now embraced the powerful combination of global capabilities from our streaming team in areas like product, engineering, data and analytics, and marketing, married with local expertise from our international team in areas like distribution, content creation and ad sales. This has already led to a clearer strategic direction streamline processes, and decision making, while at the same time reducing significant duplicative cost. Fourth, procurement is another great example of how professional management will impact our financial performance. For the first time, there is a full mandate across all of WBD to leverage the outstanding capabilities, experience and expertise of our global procurement team and we are on track to deliver hundreds of millions of P&L impact. And finally, we've begun the process of streamlining virtually every corporate and supporting function with a lot more to work through into next year and beyond. Our focus is on the hard work and the tough decisions in the spirit of repositioning this company operationally and strategically, so that in a more constructive market environment we're better positioned to capture upside revenue opportunities, which after having restructured our cost base should result in an amplified impact to our bottom line, and then an ultimate earnings power of the company significantly above current levels with real upside for long-term shareholder value. Turning quickly to the results for the quarter, given we're still in the first year following the closing of our acquisition, I will discuss all P&L elements on a pro forma combined ex-FX basis. Starting with the studio segment. Studios revenues decreased by 5% due to lower home entertainment revenues and last year benefited from COVID driven demand. And fewer new releases year-to-date resulted in less theatrical revenues and less titles hitting the Home Entertainment and Pay 1 window during the quarter. This was partially offset by a 34% increase in other revenue, thanks to the reopening of our studio tours. The revenue decline was more than offset by lower content expense for theatrical and TV, as well as lower marketing expenses from fewer theatrical releases, leading to studios adjusted EBITDA growth of 43%. Network's revenues decreased 8%. Specifically, advertising revenues decreased 11% globally, primarily given the softening demand amid well noted global macro headwinds. We have been quite transparent about the risk in the environment since the summer. Obviously, this is something impacting all players across not only the advertising industry, but the broader economy, which has more or less continues thus far into the fourth quarter. Worth noting are a few items impacting comparability with Q3 last year, namely the Olympics and the NBA Playoffs schedule, creating a few 100 basis points of additional headwind in the third quarter. Given the strong value proposition of our platforms and reach, tailwinds and digital advertising solutions from products such as dynamic ad insertion, and continued pricing opportunities, we feel very well positioned and stand ready for when the market environment improves. Distribution revenues declined 2% primarily due to pay-TV subscriber declines in the U.S. and lower affiliate rates in certain European markets, partially offset by higher affiliate rates in the U.S., and premium sports packages in LATAM. Content revenues declined 37% against the prior year comp from sub license the Olympics broadcast rights in 2021. Networks' adjusted EBITDA decreased 2% as lower content expense primarily due to the Olympics last year, as well as lower personnel and marketing costs partially offset the revenue decline.

DTC:

Adjusted EBITDA losses were $634 million during the quarter, and we continue to expect that 2022 will be the peak year for adjusted EBITDA losses in the segment with healthy improvement next year on the back of cost synergy initiatives, and positive inflection and revenue trends following the launch of the newly combined product. Turning to consolidated results and free cash flow. Both revenues and adjusted EBITDA decreased 8% during the quarter, and while still down our year-over-year EBITDA trend saw significant sequential improvement over Q2, and now expect further sequential improvements in Q4 and into 2023. Reported free cash flow was negative $192 million. And let me provide some more detail here. Cash flow from operations decreased nearly $700 million, primarily due to seasonality from the semiannual cash interest payment on a large portion of the acquisition debt, as well as merger and integration related costs, which totaled nearly $400 million during the quarter, including payout of retention bonuses to legacy Warner Media employees put in place prior to the closing of the transaction. This brings the year-to-date total to approximately $650 million. Furthermore, we reduced the balance outstanding on the securitization facility by $500 million from $5.7 billion to $5.2 billion, which also negatively impacted Q3 free cash flow, managing the program in line with a seasonal cadence of collections and revenue. As previously mentioned, we repaid $2.5 billion of debt during Q3 bringing the total debt repaid since the closing of the transaction to $6 billion. We ended the quarter with $50.4 billion of gross debt and $2.5 billion of cash on hand. Turning to guidance. Now with two months left in the year, we see adjusted EBITDA for 2022 landing towards the middle of our guidance range of $9 billion to $9.5 billion or about $9.2 billion. This is not withstanding the incremental drag from currency, and continued and greater than originally anticipated headwinds in the advertising markets across much of the globe. It also includes the additional amortization of HBO content we have implemented following the detailed assessment of our content assets. We continue to see reported free cash flow for the year at $3 billion and now we'll see net leverage at the end of the year at approximately five times. Building off of this projected baseline and looking to 2023, we continue to target and our teams are working towards $12 billion in adjusted EBITDA, and in a more normal advertising environment, we believe that target should be achievable. That said, the lack of visibility on advertising globally creates a more challenging path towards achieving our target given advertising is by far the greatest variable impacting our financial performance for 2023. I'd also like to offer a couple of other puts and takes to bridge from this year to 2023. First, synergy will be a healthy tailwind, and we expect $2 billion of incremental EBITDA impact year-over-year as I detailed earlier. Second, the first half of 2023 struts an additional tailwind of a couple $100 million from the impact of our course correction measures implemented over the last several months. For example, CNN Plus. And third, FX trends and overall pay-TV trends are naturally outside of our control and difficult to project. We continue to expect our free cash flow conversion rate to be in the 33% to 50% range. In addition to the factors described above, free cash flow will depend on the timing and size of the cash restructuring costs to be realized in 2023, as well as on content and working capital dynamics. To close, I'd like to reiterate that the future and mid-to-long term earnings power of this new combined company is as vibrant as ever, and we have decisively taken the necessary steps to enhance our operating structure and emerge as a leaner and stronger global media company, which will position us to take advantage of the eventual market recovery. We continue to focus on and invest in high quality content and platforms with a flexible approach to monetization to drive growing and sustainable free cash flows, which we believe will ultimately maximize long-term shareholder value. And with that, I'd like to turn it back to the operator and David, JB, and I will take your questions.

Gunnar Wiedenfels:

Hey, hi Kannan. Let me let me start with your first question and I'll take a bit of a broader perspective here. Let's start by the environment that we're seeing today because I think that's an important baseline. And as you know, we have been pointing to risks from the macro environment, macroeconomic environment around us for quite some time. So we're not surprised, but the reality is, as you can see in our numbers we came at minus 11 for ad sales, which is the lower end of our guidance and we see those trends continue into the fourth quarter.

David Zaslav:

On the pricing, JB, we've been doing a lot of work, peers around the world, we've been experimenting outside the U.S., may be we're not going to talk specifically about our pricing, but you could talk specifically about how we're approaching it.

Kannan Venkateshwar:

Thank you, guys.

Doug Mitchelson:

Thanks so much. I guess a clarification on the advertising. How much of this is market? And is any of this ratings trends that at the linear network and anything specific about market color that either Dave or Gunnar you would give us in terms of what's driving the softness, and as we try to figure out, you know, whether it's going to sustain or get worse or get better? And David, you talked about the content that you're manufacturing, it is interesting, and you're reading articles every now and then about the concern that you're going to pull back from investing in big content, you gave a pretty long list. Is there a better idea at this point how content spending will evolve the next few years at this company? I mean, you've got probably more detailed plans around the relaunch of streaming, probably a better idea on linear and the film slates already cooking next year. So any help with understanding just how much content spend might grow the next few years would be helpful? Thank you.

Jean-Briac Perrette:

And we're in the process of developing one lens through which we look at it. It's one company, one view on returns, and I see a lot of opportunity there from the prospect of reallocating the capital. Doug on the advertising market, look the truth is delivery, obviously, across the ecosystem is down. But that said, we have been able to grow advertising in a meaningful way with exactly that level of delivery. So my view is, this is first and foremost, a market issue. Now, as I said, the sports schedule did have an impact and put us at a little bit of a disadvantage in the quarter. For the fourth quarter as well, there is some additional tailwind in local which obviously, as you know, were less well positioned to participate in. But the reality is that the scatter market has been pretty dry right now. So it is what it is, as we know, from experience, these periods past, but it's not a very constructive environment right now, as you have heard from a number of other players, peers and across the broader advertising market over the past three, four weeks.

Operator:

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

David Zaslav:

Thanks Jessica. Just quickly on fast. We have HBO Max and we launch that product in the spring as a premium product and as an ad light product, and we'll begin to roll that out globally. As JB said, we've begun to experiment with moving some of the Discovery Plus content in there. We also have a platform that is really deficient right now. And so we're holding on and we're growing. The fact that we were able to grow almost 3 million subs outside the U.S. without a lot of promotion and with a platform that's not that great, we really think is encouraging as we begin to look at rolling out more broadly. But we also see fast as a real opportunity for us. And I think it's unique for us. We have the largest TV and motion picture library. And so there's content that belongs on HBO Max, when that product launches, whatever it's called, as well as the AVOD service. But we could see now, what are people consuming on those platforms. There's also a huge amount of content that's not even on that platform that's sitting with us that hasn't been put to monetize in the marketplace. Some of that we will sell, which we've talked about, and we've started to sell. Some of it we'll sell not exclusively, some of it, but we have the ability on the fast side to build a service without buying content, most of the players in that space, are out buying content and then looking to sell that content and create a wig effectively, where they get a return on that content based on what they spent on it. We can take content we already own, a lot of it where we have no participants, some of it where we have participants, but it's at a fraction and get ourselves into an AVOD service, which I think makes us full service. And most of that has been fully amortized, or almost all of it has been fully amortized. And it gives us effectively a full service, which you'll see as we come into the end of 2023, which is a premium service that we're driving globally, with no ads, an ad-light service, which will have a robust and attractive advertising opportunity, where even in a difficult market we're getting very good pricing. And then finally, there's always a huge number of people that do not want to pay. And we'll be able to have them spending time with us we think with an economic model, that's much advantage versus our peers. And then as we learn more, we can move the content through that ecosystem.

David Zaslav:

And remember there on average, we might be 25% of viewership on any given night, but when during the NBA we could be up to 40% of viewership, live sports, live news, entertainment nonfiction. During March Madness, our numbers will be even higher. And so the ability to use live news, use particularly live sports, which others did with the NFL and college football during a difficult market. But the fact that was such a big part and effective part of the overall viewership in America gives us a chance to get advertisers on digital news, sports entertainment, and so that that opportunity I think should give us a huge advantage if you know when the market comes back and we expect it will, we just can't predict when.

David Zaslav:

And then Jessica, may be just to close on your ad-light and TAM question, we see if you exclude the non-accessible markets of China and Russia and India for a second, just given the scale and different ARPU dynamics of that market, we think there's about, around 2 billion people around the world that are our consumers of free ad supported entertainment. And we look at about 20% to 30% of that group being addressable on the subscription side. And in the subscription side, we ultimately do see the ad-light offering that now obviously, everyone is leaning towards as an incredibly important growth initiative for us. We were frankly a little surprised in the HBO Max ad-light offering that more people have not moved to that offering and I think it says two things which are both positive for us. Number one is, we believe there's actually some pricing advantage for us on the ad free service and we can probably move north of where the prices are today. And secondarily, that we can drive particularly, we would bring the products together a lot more adoption of that ad-lights here, as we saw with the legacy Discovery Plus product. And lastly, on monetization of that tier, today we have about two to three minutes of ads in HBO Max ad-light, that's about half of what we have on Discovery Plus. So we think we have, as we roll the two combined products, almost 100% growth in the inventory available to us as we look to combine the ad loads of those two products.

Operator:

Our next question comes from Phil Cusick with JP Morgan. Your line is open.

David Zaslav:

So let me quickly knock out that clarification question and then I'll pass it to JB. So what we're saying is $9.2 billion is best estimate, pretty much in the middle, middle of that guidance range that we've given. So essentially, on a year-over-year basis, sequentially, another improvement after Q3, now Q4 better and then as I've said, I expect much more improvement as we go into next year. And this is net of the headwinds that we have digested to get to that number. Most importantly, FX has been a pretty significant headwind this year, as you know. We're expecting that to be roughly $160 million for the full year. The amortization policy change for HBO content is in a similar ballpark, a little more for the full year, but it was roughly $150 million in the third quarter as we had some catch up effects. So that's all baked into the $9.2 billion number.

Phil Cusick:

Thank you.

Declan Cahill:

Thank you. May be first to kind of pick up on Doug's question on content and ask it a slightly different way. David, between the content write down and a lot of the changes to personnel you've made, I'm just wondering how you could characterize the content strategy now. It seems like it was a little bit broken under Warner Media before. And when you think about what content is going to look like in the future, I was just wondering if you could kind of say how it's going to be different under Warner Bros. Discovery than what it is under Warner Media? And then Gunnar, maybe just a follow up on the free cash flow impact from the synergy. When we talk about the incremental synergy guidance I know that next year, there's probably a cash headwind from a cost to achieve. So in 2023 specifically, is the increased synergy guidance going to be helpful to free cash flow? Is it going to be neutral to free cash flow? Could it be a drag on free cash flow? I would just love to understand how we think about the free cash flow dynamic for 2023? Thank you.

Gunnar Wiedenfels:

Obviously, one of the big drivers for free cash flow as well is the relationship between content, cash investments and amortization. But just to go through a couple of the puts and takes, as you read in our release 650 million year-to-date, charges related to the merger, some of that cost to achieve, there's going to be a little more in the fourth quarter. And so against that baseline next year, is going to be a little higher, but it's not, you know, it's not very significantly higher. We are going to see a little bit of a closing up the gap between content AVOD and content cash, as amortization steps up. I do believe there is significant flow through from the synergies again $2 billion year over year, assuming the tax rate against that, and flow the rest through. And then two more points to point out. One is, if you think about Warner Media as a very siloed business unit driven setup, a pre-combination with Discovery, I believe there's enormous potential on the CapEx, working capital side, those are all things we can manage much differently, that's going to take a little longer, but we're going to start chipping away at it. And then the last point I want to just be transparent about on a year-over-year basis, one of the drags on free cash flow in the third quarter was the fact that we paid about $700 million of interest for merger related debt for a bond that's on a semiannual cycle. So you will get another half a year impact of that for 2023 as well. So those are the things I think we can call out right now and that's why I reiterated that, 30% to 50% of EBITDA flow through guidance for the backlog.

David Zaslav:

Actually before we can move on, I did want to mention one thing, because you were quoted a lot. You got a lot of mileage out of your statement earlier this week, I think or in the last week that one is Discovery has the greatest assets, the highest leverage in the industry or something like that, so I just want to comment on that. And while we're on the topic of free capital, I really view our capital structure as a as a huge asset. We put the structure in place with a purpose. It's cheap, largely fixed, and long dated debt. And so from that perspective, I feel very, very good about it. Very limited maturities coming up over the next couple of years. We run scenarios, obviously and there's even in the most dire scenarios, no requirement for us to come back to the debt markets to refinance anything. So it really is a bit of an asset. It's not lost on us where the debt is trading. And as we're rolling in that free cash flow that I described over the next 2, 3, 4 years, I think there is enormous opportunity for us, which is going to be in the best interest of not only the equity holders, but also the debt holders. So this is a real, real asset. And I just saw maybe laughing when your quote was picked up by the Wall Street Journal, I think this morning.

David Zaslav:

One last question operator, please?

Richard Greenfield:

I love batting cleanup. First of all, thanks for taking the questions. David, you've been pretty clear about how many mistakes the TNT management team made and sort of put you in sort of the situation you're now in. I guess, is abandoning Amazon channels one of those mistakes that you see and is revisiting that decision and the subs and cash flow tied to it. It tied to the relaunch of HBO Max sometime next year? And then second, I was just sort of thinking about your comments at the very beginning about sort of the difficult decisions you have to make ahead. And I'm curious, is NBA rights one of those just given sort of the challenges? Like, do you need NBA rights, given the kind of where the TV world is headed right now? Just how, I'm sort of just interested in like, what you meant by difficult decisions or what you're thinking about in those difficult decisions would be great? Thanks

Richard Greenfield:

Thank you for such a detailed answer. That was super helpful.

Andrew Slabin:

Good afternoon and welcome to Warner Bros. Discovery’s Q2 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I’d like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance. These statements are made based on management’s current knowledge and assumptions about future events and 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, 2021, our quarterly report on Form 10-Q for the quarter ended March 31, 2022 filed with the U.S. Securities and Exchange Commission on April 26, 2022, and our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which is expected to be filed with the SEC on or about August 4, 2022 as well as our subsequent filings made with the SEC. A copy of our Q2 earnings release is available on our website at ir.wbd.com. We released a trending schedule with pro forma results and additional financial information, which also can be found on our website. And lastly, our discussion today will include an accompanying slide presentation, which following the call, will be available on our website. And with that, let me turn the call over to David.

Jean-Briac Perrette:

Thank you, David and hello everyone. Over the last almost 120 days, I have had a chance to spend time with this incredibly talented team, take a closer look at both products and their technology, better understand our proficiencies as well as areas where there is need for further development and dig in on what consumers are saying about the two services. We have a lot of work to do, but these first few months have only strengthened our belief in the significant opportunity ahead of us. And I’m excited to share with you some initial thoughts on our strategy and road map. First, a bit of context. For decades, our industry has embraced changing technology and consumer demand by evolving a very successful windowing approach to exploiting content. However, in recent years, a strategy has emerged that suggests the video business will be better off collapsing all windows into streaming, overpaying for and overinvesting in content and offering it all at the same time for a low price. We don’t believe in this strategy. While we intend for streaming to be a critical part of our company and a key driver of our growth as consumers continue to shift their viewing habits from linear to nonlinear, it’s only one part of our diversified approach. The focus of our streaming strategy is consumer choice. We believe there are multiple global consumer segments in streaming, just like there have been for decades in traditional television. Some who are willing to pay a premium for an ad-free experience, others who are more price-conscious and prefer to pay less with limited advertising, and a sizable third group who will not pay a subscription fee and only want to enjoy ad-supported entertainment. Warner Bros. Discovery’s unmatched depth and breadth of content provides us the opportunity to offer something for everyone. Providing consumers with a range of entertainment options will maximize our reach and financial returns. Currently, we’re focused on launching our combined SVOD product with both an ad-light and an ad-free version in many markets. But as you heard, we’ve also begun to explore options of how best to reach consumers in the free ad-supported streaming space. We currently license our library to others, but we’ll assess how best to play in this growing business as the model evolves from free-to-air linear to free-to-view streaming. Now focusing on our ad-free and ad-light SVOD offering, the great news is the combination of HBO Max and Discovery+ could not come at a better time as both are enjoying strong momentum. HBO Max has emerged as the most acclaimed streaming service among consumers and Discovery+ remains one of the top-rated apps and the dominant leader in real-life entertainment. There are also two very unique and complementary streaming services, distinct in their content appeal ranging from premium scripted series like Succession and the much anticipated House of the Dragon to leading unscripted programming such as 90 Day Fiance and Fixer Upper. The two services are also different in terms of how subscribers engage with the content. Some of it being more appointment viewing driving subscriber acquisition, other content being more comfort viewing, driving subscriber retention with people watching hours on end. These are two critical and powerful components of a strong and sustainable subscription business. Couple this with our world-class collection of globally recognized brands, franchises series and characters it is truly an unprecedented combination. In an already crowded market, consumers know these brands, and they trust them to deliver quality. The quality of our content engine speaks for itself as evidenced by the 193 Emmy nominations this year, more than any other media company from drama to comedy, documentaries, the factual, lifestyle, the reality, local series from around the world, the sports in Europe and Latin America, and of course, movies. Ahead of the launch of our new combined service, we are introducing a number of exciting interim initiatives. First, content sharing. As we announced earlier today, Discovery+ will add a CNN Originals Hub on August 19, making it the home of the award-winning CNN series and films, including the Anthony Bourdain collection and featuring series such as This Is Life with Lisa Ling and Stanley Tucci

Operator:

Thank you, sir. [Operator Instructions] Your first question will come from Bryan Kraft at Deutsche Bank. Please go ahead.

David Zaslav:

Great. Thanks, Bryan. Well, let me start with the fact that the Warner Bros. Motion Picture Group has fantastic IP and a great history, as you know, when they are turning 100. And between DC., the animation group together with the entire Warner library, our ambition is to bring Warner back and to produce great high-quality films. And as we look at the opportunities that we have, broadly, DC is one of the top of the list for us. We – when you look at Batman, Superman, Wonder Woman, Aquaman, these are brands that are known everywhere in the world, the ability to drive those all over the world with great story is a big opportunity for us. We have done a reset. We’ve restructured the business where we’re going to focus – where there will be a team with a 10-year plan focusing just on DC. It’s very similar to the structure that Alan Horn and Bob Iger put together very effectively with Kevin Feige at Disney. We think that we could build a long-term, much stronger sustainable growth business out of DC. And as part of that, we’re going to focus on quality. We’re not going to release any film before it’s ready. We’re not going to release a film to make a quarter. We’re not going to release a film under – the focus is going to be how do we make each of these films in general as good as possible. But DC is something that we think we can make better, and we’re focused on it now. We have some great DC films coming up, Black Adam, Shazam and The Flash. And we are working on all of those. We’re very excited about them. We’ve seen them. We think they are terrific, and we think we can make them even better. And that’s what Mike and Pam and the team are doing and focusing on that. Strategically, we’ve looked hard at the director streaming business. We’ve seen luckily by having access now to all the data, how direct-to-streaming movies perform. And our conclusion is that expensive direct-to-streaming movies in terms of how people are consuming them on the platform, how often people go there or buy it or buy a service for it and how it gets nourished over time is no comparison to what happens when you launch a film in the motion – in the theaters. And so this idea of expensive films going direct-to-streaming, we cannot find an economic case for it. We can’t find an economic value for it. And so we’re making a strategic shift. As part of that, we’ve been out in the town talking about our commitment to the theatrical exhibition and the theatrical window. A number of movies will be launched with shorter windows. Some might have different kinds of marketing campaigns where we take advantage of us having the biggest platform and a platform that all motion fiction companies look for. But we will always be agile. Our focus will be on theatrical. And when we bring the theatrical films to HBO Max, we find they have substantially more value. And we have an ecosystem where we can have the premier motion picture business. That’s why most people move to Hollywood. That’s why most people got in this business to be on the big screen when the lights went out and that is the magic. And the economic model is much stronger. And the other thing is that we’re going to focus very hard on quality. I said we’re not going to launch a movie until it’s ready. We’re not going to go into movie to make a quarter. And we are not going to release a movie and we’re not going to put a movie out unless we believe in it. And that’s it. I mean, particularly with DC, where we think we want to pivot and we want to elevate and we want to focus.

David Zaslav:

Just – the objective is to grow the DC brand, to grow the DC characters, but also our job is to protect the DC brand, and that’s what we’re going to do.

Andrew Slabin:

Great. Operator, next question please.

Jessica Reif Ehrlich:

Thank you. I hope you meant questions. So if it’s okay, I’d actually like to go around to each one of the speakers. David, one thing – I mean, you have an amazing set of assets, but one thing that’s clearly being challenged are your linear networks. I think the big surprise in Q2 results so far is how bad the video sub losses are in the U.S. So could you just talk about your – kind of your longer-term view of your linear networks? For JB, just on the content side, it sounds like sports news are going to be an important part of your content strategy. How different is that from linear? How are you thinking about getting new content for direct-to-consumer? And then, Gunnar, just on the guidance, so if you take your ‘22 guidance of $9 billion to $9.5 billion plus $2 billion to $3 billion, I guess, synergy, we’re at $11.5 billion to $12 billion for ‘23 as a base. But what about – if D2Cs – direct-to-consumer losses are peaking this year and coming down, can you give us color on the magnitude upfront? It sounds like pricing was great, film should be normalized. Where do you see the underlying growth?

Jean-Briac Perrette:

Jessica, on the sports and news for streaming, I guess I’d categorize it as on sports, it’s really about experimentation that I’d say – and we’re going to continue to be disciplined. We have essentially two experiments ongoing, which is one where we bundle sports. In this case, Champions League in Brazil and Mexico into our core entertainment offering at the same price as a – really as an acquisition driver, and we are very happy with the results there. And then we got a second one in Europe, where we upsell sports through a – to a buy through tier at a higher price point. And obviously, we will be doing more of that now as we get closer to closing on our BT Sports deal in the UK which is probably will be the biggest experiment on that. And so we love the two experiments we have going, and I think we want to see that play out a little bit more to understand better what is the right strategy there. But we’re going to stay disciplined and smart as it relates to sports. In news, I’d say it’s really more about we see live news is still a critical healthy, important part of the traditional pay-TV ecosystem. And so, live news will continue to be exclusively in that service. But that long-form factual programming from CNN in particular, with their award-winning Originals and CNN films, that has a natural home and a huge demand that we can associate now initially on Discovery+, as we announced this morning, and then eventually sitting firmly within the future product as it comes together. And lastly, on news, we obviously continue to see outside of our kind of core streaming products with CNN.com and the CNN digital services, a lot more opportunities with over 100 million users across the world to continue to experiment with that product and move potentially on ways to find not just ad-supported models, but other models where we can monetize that significant user base that comes to the service.

Jessica Reif Ehrlich:

Great. Thank you.

Operator:

Your next question comes from Doug Mitchelson of Credit Suisse. Please go ahead.

Gunnar Wiedenfels:

Let me start, Doug, with your cash flow question. So bottom line, the drivers behind this third to half conversion guidance are essentially the same that I laid out for the EBITDA outlook. And then in addition to that, we obviously, right now, have a number of moving pieces and cross currents in our financials. As we move through our restructuring, the cost to achieve for our synergy program, there will definitely be some CapEx requirements, and we will have to see how the cadence for our content investment pans out. So these are all factors that are going to impact these numbers, especially sort of from a year-over-year basis. But to your point, I don’t want to give guidance for 2024 yet, but I am confident that we will see continued progress towards that longer term goal.

Doug Mitchelson:

Alright. Thank you.

Operator:

Your next question comes from Ben Swinburne of Morgan Stanley. Please go ahead.

Gunnar Wiedenfels:

But actually – this is Gunnar. Let me actually take both questions because I think they are very related. So, we laid out some building blocks for the longer term outlook for D2C. And to answer your question specifically, there are obviously two drivers. One is the revenue growth and the operational gearing from that revenue growth. And I think directionally, you are right. As we said, we are going to be a little more cautious regarding marketing, etcetera, before re-launching. And so a lot of that incremental growth is going to kick in sort of after our JV has re-launched their product in the summer. The other point, though, is cost savings. And as we said before, D2C has a lot of synergy opportunity. We see savings opportunities and synergy opportunities across the entire cost side of the P&L. And that obviously is going to start kicking in earlier. And I mean in the very short-term, we are all super excited about House of the Dragon. HBO, as you heard David and JB say, in the middle of the largest marketing campaign ever, so hopefully, that’s going to be a big helper for the very near-term in this quarter. And then to your point about the long-term perspective, again, the $2.5 billion I don’t want to give an additional number here, but you heard JB say what we think is possible to be achieved, $1 billion in 2025 despite the fact that we are still seeing some start-up losses in that number, even in 2025 for markets rolled out later. And we do continue to see, even for the combined company, a long-term margin opportunity of north of 20%. And that’s on the basis of our combined model now with sort of fully fledged frameworks on the various cost buckets. So, we are confident that this is going to be a great addition – an additional platform. And as we said, not being religious about turning the entire company into a support pipeline for D2C, but D2C as one additional platform. So, I think this is a great outlook. We are excited about it. We are committed, and we will implement these plans and keep you posted.

Jean-Briac Perrette:

And Ben, as you probably can imagine, the number one thing in our view for a successful streaming service as a business is to get churn down and to have a low churn number. At the end of the day, having great, but appointment – small amount of appointment viewing series, the challenge is people come in and then they go out, if there is nothing else. And ultimately, the breadth of the offering matters to get the churn down so that there is something for everyone in the household, everyone in the family. And we have seen it across all our data points where the more people you have in a household, using the service, the stickier it is, the lower your churn is, the more viable our business is. And so at the end of the day, putting all the content together was really the only option we saw to making this a viable business. And as David said, I think it’s important given some of the noise, but that HBO and the Max Originals remain the unequivocal home with the best premium television and it remains the centerpiece of our combined streaming platform given the quality that’s coming out of Casey and that team.

Ben Swinburne:

Appreciate all the color. Thanks guys.

Operator:

Your next question comes from Robert Fishman of MoffettNathanson. Please go ahead.

David Zaslav:

Great. In legacy Discovery, we own together with Mike Fries and Malone, all three media. We had 30 production companies. And we would look in awe at Warner Bros. Television as the – really the greatest and largest and most highest quality production operation and the incredible names and talent that they have. And so the legacy of Warner is creating great content and selling it. I mean less built a big business by carrying all of Warner Bros. content. I have said it before when we were at NBC, it was must-see TV. Jack Welch, when the content – when the entertainment guys left the room, he said it was Warner Bros. TV. A maker, they are a maker and the greatest maker of content. That’s the heritage of this company. We want to sell to third-parties. It’s a very profitable business for us. We think it could be more profitable. There is a lot of money being spent for the best content. We have some of the best of it. And we want to continue to do that, and we are going to do that. In addition, we have a huge library of content. And strategically, we are pivoting to the decision of anything that’s important to us to growing HBO, HBO Max, sitting down with Casey, sitting down with JB, going through the data, what’s critical to us. We are going to keep that exclusively. What kind of content could be non-exclusive and have no impact on us, why we want to monetize that to drive economic value. And then this content that we are not even using right now. So, massive amounts of TV and motion picture content that we are not using. So, do we use that to just develop our own best-of-class free platform? Do we sell a lot of that, and that’s what we are going to come back to you with.

Gunnar Wiedenfels:

And then Robert, just to clarify two things. Number one, any fast activity is not part of the guidance that we laid out earlier. Again, we will update you as we go along. And then to the point about allocating sports costs, I just want to make one thing clear. So, the way we are now segmenting the business is following the structure, how David looks at the business, that informs sort of the segment reporting structure. But importantly, we are also treating these individual segments essentially as individual units, and that means that all the intercompany activity revenues and costs are essentially negotiated on an arm’s length basis. So, from that perspective, you should assume that any content, sports or otherwise, is going to be accounted for at essentially fair third-party terms. And you will see the – this leads to a bigger chunk of eliminations in our consolidated P&L. But I think is the best way to really clearly and fairly show the actual economics of the businesses and needless to say, is also important from the perspective of our partners in the studio space. It’s very important that we account at fair market values and third-party terms.

Andrew Slabin:

Thanks Robert. Operator, next question please.

Michael Morris:

Thank you, guys. Good afternoon. I would like to ask one about HBO and the HBO brand. I know you are going to share more with us later in the year, but there has been some press indications that maybe you don’t feel like the HBO brand itself is broad enough or it doesn’t have as much value maybe on a global basis as you would be looking for. So, I am curious if you can share anything about how you feel about that brand and the future of sort of maximizing that. And my second question maybe for Gunnar. When you were discussing the items that have impacted your projections, you have mentioned a couple of times change in streaming industry dynamics, I guess relative to when you initiated the merger. I am hoping you can expand on that a bit. So, I understand that valuations have come in, but maybe could you be more specific on the dynamics that you see now is impacting the industry or the profitability of the business that you didn’t see a year ago? Thank you.

Jean-Briac Perrette:

Also the HBO brand, no matter what, as David said, being a crown jewel will live on. There is a difference between what the service may eventually be called or not versus what HBO is. HBO will always be the beacon and the ultimate brand that stands for the best of television quality. So, that remains unchanged in any scenario in our mind.

Gunnar Wiedenfels:

And then, Mike, on the industry dynamics, look, I think it’s clear that over the past 12 months and even more so over the past six months maybe, a lot of the viewpoints here have changed. And most importantly, when it comes to industry-wide subscriber growth, top line growth, and obviously, a lot of the cost structuring decisions, specifically for content sort of are being made 18 months, 24 months in advance. The most important point here for us is sort of the strategic response, as JB laid out, is one that focuses on value and on revenue rather than purely subscriber numbers. And I also think if you take a step back here from a longer term perspective, the way I look at the changes in the industry, I view that actually as additional support for how we have all along been describing our strategy. D2C is one platform in a larger portfolio of assets and in a larger lineup of distribution outlets. We are not going to be religious about driving hard to fuel just one platform. D2C has its space and Warner Bros. Discovery is uniquely positioned with the enormous surface area with our customers to service them and to tell great stories for decades to come.

Operator:

Your next question comes from John Hodulik of UBS. Please go ahead.

David Zaslav:

Thanks. Look, we will – we are going to spend significantly more on the HBO Max product, in other areas, we will spend less because we are not finding an effective return. In the aggregate, we are going to spend more money on content. We are a content company. That’s our product. That’s what we do. We want the best creatives here at Warner and at HBO and at Warner Bros. Television and across our traditional platforms, creating content. And we have worked in the budget that, that content spend will go up in each year and the years to come. JB?

David Zaslav:

But the number – the number on the corner of JB’s desk and mine is the breakeven and the $1 billion. If we do that – I don’t really care what the number is. We are not in the business of trying to pick up every sub. We want to make sure we get paid. We get paid fairly. We have very high-quality content in many markets, we should be paid more because we are providing dramatically better content and more robust content and higher quality content. If the number is 122 and we are making over $1 billion, that is the number for us. We are going to grow subs significantly, but we want to run – we want to drive profitability and free cash flow.

John Hodulik:

Makes sense. Thanks guys.

Operator:

Your next question comes from Jason Bazinet of Citi Group. Please go ahead.

David Zaslav:

Thanks Jason. First, I think having both is a gift. This is a fully balanced company. We have our linear and free-to-air. We are a big maker of content for profit. We have gaming where we take our IP into gaming for profit. We have the motion picture business to gather some of the greatest talent in the world and for profit, and then we have our streaming. So, having the amount of free cash flow that we are driving to in order to fund and support thoughtfully the streaming business, which is critical as we transition, is a gift. I do think the business is going to change. There will be probably over time, there will be re-packaging. It’s for people to – they will probably end up being a couple of the best services, which we expect and will drive to be and they will be re-packaging either by the programmers or by intermediaries like an Apple or a Roku or an Amazon. And the experience the consumers will become easier and as it becomes easier, some of the economic terms and churn may change. I believe it’s over – that it’s underpriced. What has ended up happening is it was a reaction to the capital markets. Let’s just go ahead and collapse businesses, overspend on content. People have shown that they were very happy to buy HBO, Showtime, Epic [ph]. There is a big group of people in America that love premium television. There is a big group that love a robust bouquet of opportunity. And they are willing to spend a lot of money domestically and outside the U.S., not as much, but they are willing to pay. It was a decision to say, why have them pay a lot. Let’s just collapse everything in and spend, spend, spend and then charge very little. And I think that was supported by this idea like clicks in the ‘90s that subs were going to be great currency. And so we are going to be very sensible. We are about free cash flow. We have got the best library, we think and the highest quality content. We think we could build a great business – streaming business to touch everyone. But we are not collapsing businesses on it. And I think sensibility will be that there will be a lot of people that are willing to pay a lot more for the quality that we have.

David Zaslav:

We effectively have four, five or six cash registers. If there is a cash register where a consumer can come in and either watch or pay for a piece of content, we have every platform in the ecosystem. And in a world where things are changing, and there is a lot of uncertainty and there is a lot of disruption, it’s that’s – to me, that’s a lot more stable and a lot better than having one cash register.

Operator:

Your next question comes from Doug Creutz of Cowen & Co. Please go ahead.

Jean-Briac Perrette:

Yes. Doug, we will have a migration plan that will allow, obviously, some element of, particularly, as you can imagine, the lower price Discovery+ subscribers for some period of time, to grandfather into the new product and migrate them – or migrate as many of them as possible up to the new product. And so that is all part of the transition plan to obviously get people, optimize the number of subscribers that we retain, but at the same time, at some point, make sure that the people who own the service are stepping up at some point in time to the inevitable higher price point than the current Discovery+ prices that are at today. So, there will be a transition plan that maximizes essentially retention of subscribers, but ultimately also gets to the right ARPU and price points over a relatively short period of time.

Andrew Slabin:

Thanks so much Doug and thank you everybody for joining us. And that will conclude our call.

Andrew Slabin:

00:39 Good morning and welcome to Warner Bros. Discovery's Q1 earnings call. With me today is David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. 00:52 Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and 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, 2021, and our subsequent filings made with the US Securities and Exchange Commission. You should have received a copy of our Q1 results. If not, please feel free to visit our website at ir.wbd.com. 01:44 With that, let me turn the call over to David.

Gunnar Wiedenfels:

15:51 Thank you, David, and good morning, everyone. What an exciting moment. It's great to finally be able to tackle the challenges and embrace the opportunities ahead as we begin the hard work to integrate WarnerMedia and Discovery. Please remember that today's call is predominantly meant to discuss Discovery's Q1 operating performance. So as you know, our merger with WarnerMedia closed just after the end of Q1 on April 8. To the extent possible at this time, I will share some reflections on our early observations, as well as WarnerMedia Q1 results that AT&T disclosed last week. 16:25 Starting with a quick review of Q1 results for Discovery standalone. Discovery's first quarter US advertising revenues were up 5% year-over-year. Our next-gen advertising products like Discovery+ and Go performed well and we continue to see positive impact from last year's upfront, which helped to outpace delivery declines on the linear side. While the scatter market continues to be solid with pricing up over 30% versus upfront, visibility, not surprisingly, continues to remain limited given the current macro environment. 16:57 For us, categories like auto, technology and CPG are weaker versus last year, while travel, entertainment and retail remain healthy. US distribution revenues were up 11% year-over-year, largely driven by the growth of Discovery+ subscribers throughout 2021, while linear affiliate revenues were also up year-over-year as rate increases continued to outpace subscriber declines. Our fully distributed subscribers were down 4% as were total portfolio subscribers when correcting for the impact of the sale of our Great American Country network in early June last year. 17:35 Turning to International, which I will discuss on a constant currency basis. Advertising grew 11% in the first quarter, in part helped by the Beijing Winter Olympic Games, as well as underlying momentum in certain key markets, such as the UK, Germany and Latin America. That said, we did begin to see some limited impact from the conflict in Ukraine towards the end of the first quarter in markets such as Poland and Germany, as well as some macro headwinds similar to the US. While visibility remains limited in certain key European markets, at this moment we expect Discovery standalone international advertising revenues to grow in a similar fashion with Q1 excluding the Olympics impact, which was a nice positive. At the moment, we're pacing up low-single digits. 18:22 Distribution revenues increased 8% during the quarter, largely driven by continued growth of Discovery+. Do note, that we did not launch any new markets during the quarter as we previously outlined and in line with our strategic thinking coming into the closing of the merger. On the linear side, we continue to see healthy growth in LATAM, while pricing pressures in certain European markets remain a headwind. This also in part reflects hybrid affiliate deal structures, which balances affiliate fees and D2C distribution. 18:52 Furthermore, note that revenues from our Russia JV, which we announced we had exited are recognized as distribution revenue. This resulted in a 100 basis point drag to distribution revenues during the quarter. I would also note that Discovery's exposure to Russia and Ukraine in total is less than 1% of revenues and 1% to 2% of OIBDA. 19:13 Operating expenses were up 11% during the quarter, primarily due to the Olympics. Excluding the impact of the Olympics, OpEx declined by 2% year-over-year as lower marketing costs as compared to the elevated Discovery+ launch than last year were partially offset by higher content costs across our portfolio. Net-net, we finished the quarter with $1.03 billion of OIBDA, up 23% year-over-year, including a small negative impact from the Winter Olympics and roughly $170 million of investment losses. Net income for the quarter was $456 million, resulting in GAAP EPS of $0.69 per share. 19:53 Now turning to some housekeeping items to consider for the quarter as you update your models. First, we recognized a $0.58 per share gain from the $15 billion notional interest rate hedges that we implemented last year. We unwound this hedge in mid-March in conjunction with the successful closing of our $30 billion debt offering. Second, the impact of PPA amortization during the first quarter was $0.49 per share. As I mentioned on our last earnings call, we decided to take a more conservative position and accelerate the amortization of purchased customer relationship intangibles. As a result of this, our Q1 D&A expense increased by $164 million year-over-year. Adjusted for the two items I noted, EPS would have been $0.60 per diluted share. 20:42 Turning briefly to the WarnerMedia results that AT&T reported last week, which I'd note is based on how AT&T has historically reported the segment and which we’ll not necessarily tied to carve out financials or how we plan to segment the business going forward. We are working on Q1 carve out financials for WarnerMedia, as well as updated pro forma financials for Warner Bros. Discovery, and we will have those disclosed before the end of the quarter. 21:07 Sticking to the reported numbers for now, underlying performance at HBO Max during Q1 was healthy with growth of 3 million net adds, reflecting continued strength of the programing slate. In total, together with Discovery's 2 million net adds, the pro forma company added 5 million paid subscriptions during the quarter. Adding the two subscriber basis, we ended the quarter with just over $100 million global D2C subscribers. 21:33 So, please note, that we are still working through alignment of our subscriber definitions and the focus of our subscriber reporting going forward, after which we will have a more refined and detailed update when we report second quarter results. However, the operating result as you have seen, were down in WarnerMedia's first quarter, a 33% decline versus prior year to $1.3 billion. 21:56 Free cash flow was down even more, declining by $2.6 billion versus prior year and more importantly, significantly negative in absolute terms. Again, this is for WarnerMedia and the AT&T segment structure and includes elements that are not part of Warner Bros. Discovery going forward. In my mind, there is both good and bad news in these results. 22:17 Starting with the bad news, Q1 operating profit and cash flow for WarnerMedia were clearly below my expectations. And given that Q1 performance and previously unplanned projects in sight, I currently estimate the WarnerMedia part of our profit baseline for 2022 will be around $500 million lower than what I had anticipated. However, with the positive offsets of a couple of hundred million dollars on the Discovery side of the combined company. 22:44 Opening leverage as a consequence of this, while still dependent on working capital adjustments that have yet to be finalized is likely to be a notch higher, now estimated around 4.6 times give or take and still well below the initially modeled 5 times. Net-net, being the first year of our integration and as we've explained all along, 2022 will undoubtedly be a messy here, so a lot of moving pieces and now a somewhat less favorable starting position in Q1. 23:12 The good news, on the other hand is that, I also see more opportunity as I work through the numbers. There are certain investment initiatives underway in plain sight that I don't think have attractive enough return profiles. As such, and with our new combined leadership team in place out of the gate, I feel very confident in our ability to rectify some of the drivers behind the business case deviations and some very quickly, with the CNN+ decision last week being Exhibit A. 23:38 And while we're still early in our integration process and are still at the beginning stages of initiating our synergy as well as strategic and financial planning, we feel more confident than ever about achieving our $3 billion cost synergy target, and believe there is a much greater opportunity off of the current baseline and that target will ultimately prove conservative. And to be clear, we remain fully committed and reiterate our financial targets for 2023, and I remain very confident that we are on track to achieve our target gross leverage of 2.5 times to 3 times at the latest 24 months after closing. We are refining a more detailed bottoms-up combined budget and long-range plan, the key insight of which we look forward to sharing in the months ahead. 24:23 Prior to that, I wanted to share some high-level priorities that we're digging into early on, as well as some initial financial and operational since close. Number one, content. I'm working very closely with our creative and financial leadership teams to examine the totality of our $23 billion plus of annual content spend to analyze the ROI of each dollar spent. The goal of this exercise is not to identify ways to reduce what we spend on content, but to harmonize processes and analytics, so as to be more consistent and efficient in how we allocate our content spend across the entire global portfolio to optimize returns. 25:03 Second, marketing. The combined company more than $5 billion each year on marketing and that doesn't include the opportunity cost of cross-promoting assets across all of our platform. We intend to drive for the highest level of financial discipline here to make sure that every dollar spent is purposeful and measured. This will prove to be an enormous opportunity for cost synergy capture across the globe and within each and every business line given the significant overlap geographically and operationally. 25:33 Lastly, working capital. Since I joined Discovery five years ago, the key focus area has been to improve working capital efficiency. This has been a critical part of the formula that has led to our free cash flow conversion rate being among the top end of our peers. Similarly, I believe we have a tremendous opportunity to continue improving working capital efficiency at Warner Bros. Discovery, operationally and structurally, and this will be a key ingredient in achieving our free cash flow conversion rate targets. 26:02 As I stated at the beginning of my remarks, I am invigorated by the opportunity ahead to build a unique and truly remarkable media company centered around unparalleled IP and a balanced monetization model to drive sustainable profit and free cash flow growth. We're only 18 days in and are still at the very early stages of integration and refining our long-term strategy, and we look forward to sharing more about our plans in the coming months. 26:28 The new combined management team is completely aligned around our philosophy to manage Warner Bros. Discovery with the highest level of professionalism, with diligent analysis and decision-making, accountability and overarching coordination of our balanced portfolio of assets in the best interest of the company, focused on free cash flow and firm value more than anything else. 26:49 Now, with that, I'd like to turn the call over to the operator, and David and I will be happy to take your questions.

Vijay Jayant:

27:23 Good morning. Just wanted to get some perspective, obviously, you’ve made some decisive decision on the CNN+ shutting down. Are there a lot more opportunities across the Warner Brothers' businesses that can result in material saving of costs going forward that you've sort of seen that could help the long-term cash flow story? 27:48 And second, just for Gunnar. In terms of working capital and free cash flow, obviously, this year there's going to be a lot of puts and takes with cost to achieve and fees and so forth, and also the adjustments that came through the transaction with Warner Brothers. I think you paid about $2.5 billion less than the original deal price. Any sense of all the puts and takes, you can help us with what the free cash flow trends can be given where you're starting from? Thanks. A - Gunnar Wiedenfels 28:18 Vijay, let me start with the last one, because I want to make it clear. We're still working through our opening balance sheet and there is working capital adjustment work that's still in sight, and I prefer to discuss the details of those results when we have all that fully baked and audited in hopefully, a few weeks here. But I think the bigger picture here is, as we've said, 2022 is going to be noisy. And you've mentioned some of the factors that are going to flow through. But if I take a step back here and just look at, call it, the past 15 months for WarnerMedia sort of as a carve out-group, we're looking at more than $40 billion of revenue and really virtually no free cash flow. And right or wrong, management has made a decision to invest a lot of the incoming funds into a number of investment initiatives. And as I'm looking under the hood here again, CNN+ is just one example, and I don't want to go through sort of a list of specific examples, but there's a lot of chunky investments that are lacking what I would view as a solid analytical, financial foundation and meeting the ROI hurdles that I would like to see for major investments. 29:32 And so, we are -- this is an opportunity, we're going to be able to continue the initiatives that makes a lot of sense and reallocate some funds or drop some cash to the bottom line, but it's an opportunity. We're in the process of working through that. And as I said, 2022 very much looks a little messier than probably what I had hoped for, but for 2023, I am more encouraged than ever and I think it's going to be a very clean another area that you may have picked up from David a minute ago is that, at this point, it's not being religious about any of these decisions. We'll make decisions on the basis of the data that's available and clean financial analysis, and I think there is a ton of opportunity.

Vijay Jayant:

31:31 Okay. Thanks so much.

Operator:

31:34 And your next question comes from the line of Kutgun Maral with RBC Capital Markets. Your line is open.

David Zaslav:

32:36 Thanks so much. Look, I think it's a big benefit that we're a fully diversified company with the largest maker of content and whether it's Ted Lasso or we have over 100 series that we're producing, and more than 50% of those are for third parties, and we're generating a lot of revenue by being a great producer and maker of content. In addition, we have our traditional business which we're outperforming and we're generating a lot of free cash flow. 33:07 Having said that, the idea of Discovery coming together with Warner with all this great IP and being able to reach above the globe, from my perspective, remains an even bigger opportunity. You take a look at what Netflix has done over the last several years and what Disney has done, they've cloud a path and behaviorally people have gotten acclimated to buying content, they got acclimated to watching content on different devices, how to move content around, and here comes this new company with this lane and it's wide -- the middle line is wide open for us to accelerate with the broadest and most compelling IP in the world, whether it's DC or Hanna-Barbera, Loony Tunes, Harry Potter, Game of Thrones, HBO. And so we put this altogether together with what we have at Discovery. And when I say we're going to be disciplined, people are spending hours a day with Discovery+. We have content, a huge library about as big as Netflix. 34:17 You put that together with the shock and awe of HBO Max. And the first question for us is, that looks like a pretty combustible compelling broad offering. In Europe, it's sports, it's non-fiction, it's entertainment, it's HBO. To get here in the US, it's all of the content, which many months we're the leader for women in the US with what we have and our product is very low churn. So we start with, I think a very differentiated, very broad, very compelling offering that has IP that people know and that's attractive to everybody in the home. 34:54 And our data says that the more people that use it, the more often they use it, the higher the growth and the lower the churn. And so, we're very enthusiastic about driving down that lane with our ad-light and subscription service. But we also in this moment of uncertainty feel very strongly that this diversified company is going to give us the ability to have that conviction and to have that discipline because we're generating huge free cash flow. 35:28 I've been at Discovery now for 15 years, and for those of you that have followed us, we're focused. Discovery was a free cash flow machine. We were generating over $3 billion in free cash flow for a long time with investing in our new media, which we did successfully, and we learned a lot. We still were generating almost $2.5 billion of free cash flow. Now, we look at Warner generating $40 billion of revenue and almost no free cash flow, and with all of the great IP that they have, we bring this discipline and this focus on what are we investing in. Are we investing in assets that are going -- investments that are going to generate real return? Is this going to help our subscriber growth? Is this going to be helpful to us in our platforms? And we think that there's a real opportunity for us.

Kutgun Maral:

37:18 That's great. Thank you, both. And I'm sorry, if I could just squeeze one more in. I realize it's still very early days, but now that the deal is closed, can you talk maybe a bit more about top line synergies? When you think about the combined company scale and IP portfolio, it's fairly massive, so it doesn't really take a lot of heroic estimates across potential upside to linear advertising to affiliate fees, to DTC to come up with a fairly needle-moving total top line synergy number, maybe I don't know, $1 billion or $2 billion. So any updated thoughts on the opportunity with the top line synergies and the path to get there? Thanks.

Operator:

41:30 And your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities. Your line is open.

David Zaslav:

42:43Thanks, Jessica. So you're right, I mean it was -- our number one thing is, how do we service clients with simplicity one-stop? And so, we've restructured and in these advertising-facing meetings, we've already gone out to agencies and advertisers, and it is simpler, because it's -- before it was sports, it was Warner Entertainment and it was Discovery. Now, it's all in one. And as you said, we also have all this digital inventory, which is in great demand, whether it's Bleacher or whether it's cnn.com, which is the largest dot com, the largest site for news in America, together with the ad-light product on Discovery+, together with the ad-light product with HBO Max, and all of our other digital assets. So, it's one place to get the broadest demographics and all the different types of content that an advertiser can won. And Steinlauf and Bruce can sit down with an advertiser and address really whatever needs they have, but sit down at the table as the as having the largest reach or close in the marketplace and the broadest scale of diverse content. So I think it puts us in a very good place to service advertisers. Do you want to?

Jessica Reif Ehrlich:

45:11 And Gunnar, can I just ask a quick follow-up? When you said that there was a shortfall on the part of WarnerMedia of $500 million, where does that come from?

David Zaslav:

45:57 Just one follow-up that I think it's going to be interesting for next year in terms of sport. It'll be the first year that all the playoffs for a major US border on cable, where the hockey will be on ESPN and will be on TNT, and rest all the playoffs will be on us and ESPN.

Operator:

46:23 Your next question comes from the line of Bryan Kraft with Deutsche Bank. Your line is open.

David Zaslav:

47:17 Yeah. Bryan, so thank you. So look, when it comes to the timing for the relaunch, again, I don't want to make any new commitments here. The team is working hard right now as one combined team to hammer out the exact cadence here, and we will come back to you all once we have a fully baked firm plan here. What I can say about the interim period here is, we're not changing our mindset. So the priority for the team is to sort of rally behind that integrated product and at the same people we will continue to be very thoughtful about our spend. We will not launch any new markets for the time being. We will not sort of chase aggressively behind subscriber growth as long as we are working on this priority one, which is getting these products together. 48:10 That said, all I've seen so far makes me very, very enthusiastic about the opportunity of the combined product, but a great cadence of content coming to the market here, House of the Dragon for the third quarter, I think it's going to be exciting global phenomenon. So we feel very good about it, but we will continue to be very thoughtful as we have been going into this -- into closing this merger here.

David Zaslav:

50:13 And then, maybe Bryan, on the password sharing point. As you may have heard before, both from us and the HBO Max team that there is a process in place. There is a dedicated team, and I would just say that this is not a rapid problem here. And in fact, I think it's a small number of cases where we see a high risk of that sharing activity happening.

Operator:

50:43 And your next question comes from the line of Rich Greenfield with LightShed Partners. Your line is open.

David Zaslav:

51:57 Thanks, Rich. It actually makes every sense because what you need is a diversity of content for everybody in the home, and they may come in for Euphoria, but our research shows that people watch Euphoria, their favorite second show to watch is 90 Day Fiance. So having a diversity of content is a reason why people are spending hours with Discovery+, because there -- and they watch Discovery+ at different times of the day, but the same people that are watching Julia, a great new series or watching Gilded Age, they're turning around and they're watching Big Bang Theory and they're watching Friends. That's why HBO Max has been able to continue to grow so aggressively. 52:40 And so, when you put all of this diversity of content together, there is content for kids, there is content for teens, it's basically everybody in the family, why would you go anywhere else. We have all the movies, we have all of the library content that you want. And I think better is better. That was the point I was trying to make that if we have -- if Casey and the HBO team, who I spent a bunch of time with this past week, extraordinarily talented team. They've been together at leadership for more than 15 years, all of them. They have a system, it reminds me of the Disney Alan Horn, Bob Iger. The way that they were able to really outperform the market, Kevin Feige, Kennedy, they were able to outperform the market with Motion Pictures for a period of years. You look at the way they focus on quality, whether it's Julia, Winning Time, Gilded Age, Euphoria, Flight Attendant, and Just Like That, Barry, they just launched. 53:46 And this is an ability to really own kind of the cultural importance. And the idea they are just doing more shows, you look at HBO right now, what it really needs is precisely what we have. That -- when they finished with watching Winning Time, they can go and watch Friends or watch Big Bang or watch their favorite movie or go over and watch Oprah or watch some TLC shows just for fun. So, we believe and we see this in Europe where we tried to offer, we thought that the answer was just to offer niche high quality that you get high-quality shock and all content together with a lot of nutrition, in our case in Europe, together with sport and you offer something that everybody in the family users and the churn goes way down, it's much harder to churn out of a product when your kids use it or your significant other uses it or your mom and dad are watching, but also if you find yourself watching it more often. So, I think it's precisely why we did this deal. And I think everything tells us that it's going to make us stronger and more compelling because of the breadth of the quality menu of IP that we have.

David Zaslav:

55:29 Well, first of all, we've been growing our traditional business. We recognize that 4% of subscribers are down and viewership on the platform is down. But when our competitors are taking content off constantly of that platform, it gives us an opening for us where we're doing a lot of original content on. We're obviously, all original of the CNN. Sports is live and tune in and then we're doing original on food, on home, on Discovery and so, and we see it outside the US. Long-term, there's no question that the business is challenging, but CPMs are increasing, advertisers still are looking for -- they are chasing and chasing for inventory, because it's the most effective inventory in long-form video. 56:16 And look, remember, broadcast for a period of 20 years was declining and CPMs were increasing. I was at NBC in the mid-'90s when Welsh was saying this can't continue. We can't have smaller and smaller audiences and make more and more money. And I think he was right or maybe he will be right eventually, but it's almost 30 years later and the advertisers are still paying more than the hurdle rate of decline. So, we will be leaning in with efficiencies and effectiveness to our traditional business, which we think -- which generates an awful lot of free cash flow, we will be leaning in as a maker at Warner Brothers Television where we're selling, we're an arms dealer and we could sell content and we're selling because we're the best producer of content. We're selling content and getting prices in bidding wars to get that content, and we'll continue to do that. And then right down that middle lane, we'll be building that important growth engine of starting with HBO Max and Discovery+ and what we have across Europe. 57:25 And finally, I'll just say that, that traditional platform, the other night during the playoffs we reached more than 50% of the people that were watching television across our platforms. As Gunnar said, there's a lot of money being spent to try and reach an audience. We now have the same or in many cases, the largest reach on television in the US. And the ability to use our own inventory to promote to and from all of our products and the efficiency of doing that and the cost savings of doing it, I think is a big plus for us.

David Zaslav:

58:45 And as the largest maker of content, we can change strategy. The world is changing. If it turns out that producing more content for ourselves, because we're accelerating down that middle lane as a global direct-to-consumer business, we're not going to have to go right a lot of checks to others to get the best content because we have the factory.

Operator:

59:10 And your last question comes from the line of Steven Cahall with Wells Fargo. Your line is open.

David Zaslav:

60:13 Thanks, Steven. Well, first, let me start with news and CNN. The great -- I love the news business, we love the news business. CNN is the leader in news. They are the leader in global news, they are the best journalistic organization in the world, which they're showing. We've got a great new leader Chris Licht that's going in there. We're fully committed to it. And we think that as we look at news around the world, it's never been more important, even in the US and around the world there is mostly advocacy networks. 60:48 The ability to provide journalistic -- great journalism and facts and those two elements are the foundation of a civilized society. We need great journalism and great facts to make the right decisions. And advocacy networks that make a lot of money by generating and supporting an audience is a great business, but CNN is in the business of journalism first and that's what we're going to fight for, but it's also as importantly, it's a really, really good business, because we own it. When it comes to the entertainment business, whether it's DC or Harry Potter or Hanna-Barbera, that's IP that we own. When it comes to sports, we're very careful about sports. And the TNT and Warner team was clever about getting long term rights which we're going to get a lot of benefit from, but sports are rented and news is scalable. 61:53 We are already in Europe and the ability to take CNN around the world more aggressively and own that and the value of that, because when people get up every day there's lots of entertainment content they want to see. But as human beings, we wake up, are we okay, and then what's going on in the world. And being able to own that with the greatest brand in news is really compelling. And so, we're committed to it. We think it's a differentiator. We see already in Europe that when we put it together on our subscription platform that people come to it often, it reduces churn and it increases appeal. 62:32 And so -- and finally, I think cnn.com is a new media asset. People are looking at news on their devices and we're the leading place that they're going for news, we're pushing breaking news to people on their devices, on every device, and that creates a real connection. When people see CNN and they see that on their device, it's meaningful. 62:57 And so, Chris is going to start his journey in the next week or two. I'm watching CNN. I think we all are, and it's a treasurer. And what Ted Turner tried to create is something that is really meaningful and we take that seriously and it's a solid moment with the war in Ukraine, but ultimately, when there are war trials, the Exhibit A, B, C and D will be the great work of the war correspondence that are risking their lives to get what's going on there on video and in camera. And it's probably what differentiates this war from almost any other, and it's probably one of the reasons that galvanized NATO and galvanized the world and what's going on because of the work that CNN has done. So we're fully committed. 63:50 On DC, I would just say, we think that DC is an extraordinary opportunity. Batman, Superman, two of the biggest brands in the world, maybe one in two, maybe one in three. So I think there is over 100 characters. And let's just say that we're going to focus very hard on building a long-term plan. Batman was just very successful. It was also very successful on the platform when it dropped this past week, which I think, it's just one piece of data, but it's a very good sign. 64:27 I've been saying for a very long time, owning Warner Brothers' Motion Pictures, together with the streaming service, together with a big factory maker of quality content and Warner Brothers Television, together with the largest traditional media business, global business is a great recipe and a very balanced attack. But there was a question about whether opening a big movie should we really collapse the entire Motion Pictures business on streaming. And I think I've been saying no, but I think now the data is starting to show no way that when you open something -- when you open a movie in the theaters, it has a whole stream of monetization. But more importantly, it's marketed and it builds a brand. And so when it does go to the streaming service, there is a view that that has a higher quality that is -- that benefits the streaming service. And so that's been my theory. 65:31 I think Batman -- the early data is that, Batman did extremely well in generating viewership and in generating interest, even though it was in the movie theaters first. So, I think that's a great sign for the Motion Pictures business. I think the Motion Pictures business is still, where you tell you -- the most compelling global stories because you're with other people and it's that big screen and its magic. And it also gives us a chance to attract the greatest and most compelling talent, because you fight over it at the top of the ecosystem, and that's the Motion Pictures business and we are Warner Brothers and so we're excited about it.

Operator:

66:19 Thank you. That concludes Warner Bros. Discovery, Inc. first quarter 2022 earnings conference call. You may now disconnect.

Andrew Slabin:

Good morning and welcome to Discovery’s Q4 earnings call. With me today is David Zaslav, our President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, President and CEO of Discovery Streaming & International. Before we start, I’d like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance, as well as statements concerning the expected timing, completion and effects of the previously announced transaction between the company and AT&T relating to the WarnerMedia business. These statements are made based on management’s current knowledge and assumptions about future events and about 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, 2021, that we expect to file post this call and our subsequent filings made with the US Securities and Exchange Commission. And with that, I’m please to turn the call over to David.

Gunnar Wiedenfels:

Thank you, David. I'd like to start by echoing David's comments, this was indeed an exceptional year for Discovery, and one in which I believe we made significant strides across our financial, operational and strategic priorities. Speaking to our financial accomplishments, I am proud of our continued focus on transformation and deficiency during continued disruption in our industry. Notwithstanding over $1 billion of losses from our investment initiatives in 2021, we finished the year with over $2.4 billion of free cash flow, the 64% conversion of AOIBDA. The true testament to both the resiliency of our core networks, as well as overall balance of our global portfolio of assets. Moreover, we ended the year with $4 billion of cash on our balance sheet and net leverage of 3.0 times both of which have continued to improve thus far in 2022. And based on our current momentum, I remain very confident with our projected net leverage at closing of 4.5 times or better and reiterate that our long-term target leverage range for Warner Brothers Discovery remains 2.5 to three times, which we intend to achieve within 24 months from pros and possibly sooner. Now turning to the quarter, let me briefly provide some color on Q4 results for which from a high level underlying trends are more or less consistent with those of the last few quarters. In the US, Q4 advertising was up 5% year-over-here, largely driven by strong pricing in linear and further supported by continued traction in the AdLite tier of discovery+. As I mentioned on our last call and not surprisingly, we have seen hints of softness in the scatter market due to supply chain disruptions and some categories softness around COVID. Visibility remain limited as supply chain issues persist and we currently see low to mid-single digit growth in Q1. US distribution revenue increased 17% helped by discovery plus at higher linear affiliate rate more than offsetting declines and linear pay-TV subscriber numbers of around 4% for our fully distributed portfolio. Turning to International which I will discuss on a constant currency basis. Starting with advertising momentum is quite a bit stronger than here in the US, increasing a healthy 12% in the fourth quarter benefiting from robust performance in all regions. We continue to enjoy pricing upside resulting from healthy demand across EMEA, particularly in the UK, Poland and the Netherlands. While Latin America continues to recover nicely, also helped by share gains in key markets like Mexico and overall healthy demand. We are at the very early stages of rolling out an international AdLite tier for discovery+ first in the UK and Ireland in March with additional markets EMEA to follow enabled by the International replatforming which David previously alluded to. We are enthusiastic about the incremental consumer focused feature enhancements which we expect will drive better engagement, resulting in continued churn reduction and monetization upside. Distribution revenue increased 5% during Q4 as ongoing affiliate fee pressures in certain EMEA markets have been more than offset by the growth and discovery+ subscribers with strength in key markets like the UK, the Nordics, Poland and Brazil. On the expense side total Q4 operating expenses increased 9% Also revenues decreased 4% helped in part by a more normalized sports schedule in Europe, partially offset by continued investment in content for discovery+. SG&A increased 29% due to overall marketing spend to this to support discovery plus subscriber growth and new market launches. Lastly, operating expenses in our core linear business decreased in the low single digit range for the year in line with our guidance. To that end I'm very proud of the efforts across the company to support continued efficiency and overall cost management. AOIBDA for the quarter was up 15% to over $1.1 billion and was down only 8% for the year to $3.8 billion, which taken in the context of an increment of $600 million investment NextGen initiatives and a roughly $200 million loss for the Olympics. I am extremely proud of our results. I do want to take a minute to call out both the criticality and the resiliency of our core linear network business. We continue to invest and support these important brands and franchises while at the same time look to drive operational efficiency across the globe as we maximize their contribution to free cash flow and to fund our continued investments in direct to consumer. Now turning to some housekeeping items. And a couple of items to consider for the quarter as you update your models. First, US other revenue was up $74 million during the quarter due to a non-recurring non-cash item which flowed 100% to AOIBDA and which was a positive $0.08 per share impact. Second we recognize a $0.13 per share non-cash loss from the $15 billion of notional interest rate hedges that we implemented in the third quarter to mitigate interest rate risk for future debt issuances to finance, the cash portion of the WarnerMedia transaction. As I mentioned on the last earnings call, we are required to report the changes in fair market value on our income statement, as the derivatives do not qualify as hedges for accounting purposes, which could result in some additional variability to our net income until the WarnerMedia transaction closes. Third, Group Nine signed an agreement to merge with Vox in December 2021. As a result of the transaction, which closed earlier this week, and the estimated value of our ownership in the new company we recognize a $0.10 per share non-cash impairment charge. Finally, the impact of PPA amortization during the fourth quarter was $0.51 per share. This is higher than in prior quarters as we reassess the useful life and amortization method for all the purchase customer relationship intangible. While the useful lives of these intangible assets did not change, we decided to take a more conservative position and accelerate amortization to better align with expected cash flow. As a result of this, our Q4 D&A expense increased by nearly $200 million. Adjusted for all of the above, EPS would have been $0.73 per diluted share. Our full year effective book tax rate was 16%. Our cash tax rate was 25% for the year excluding PPA, amortization. For 2022, we expect our tax rate to be in the mid-20% range while our cash tax rate is expected to be in the low to mid 20% range excluding PPA for discovery standalone. And based on our plan rates, we expect FX to have a roughly $90 million to $100 million negative year-over-year impact of revenues and a negative $5 million to $10 million impact on AOIBDA in 2022, inclusive of the existing hedges. A quick update on where we currently stand in the transaction process. We have already satisfied most of the conditions to close, unconditional clearance from the European Commission, the expiration of the HSR waiting period, clearance from all other key international markets and a favorable private letter ruling from the IRS for AT&T. We also filed our final merger proxy earlier this month and have scheduled our stockholder meeting for March 11. Following the vote and assuming the deal is approved by our shareholders, this puts us on a clear track close in early Q2. That will be a wonderful achievement that reflects our best case estimates from a year-ago. I am encouraged by the continuing operating and financial momentum at Discovery, during what has undoubtedly been a hectic year. And we could not be more excited to get going on integrating the two companies as well as delivering the promises we have made to you including $3 billion plus of cost synergies and driving significant free cash flow to deleverage the company down to our target leverage range within 24 months. Having recently conducted some high level meetings across our respective companies, I think it's fair to say that both the Discovery and Warner teams are eager to begin collaborating in earnest to build one of the most dynamic media entertainment companies in the world. Now with that I'd like to turn the call over to the operator and David, JB and I will be happy to take your questions.

Robert Fishman:

Given the new geopolitical risks from Russia, can you just remind us what percent of Discovery's revenue come from Europe and Asia, or what it would be on a pro forma basis for Warner Bros Discovery? And whether you've seen any early pullback on advertising in the region, obviously understanding that the Olympics just wrapped up there, then have a separate one for goner on the AMORT policy?

Gunnar Wiedenfels:

I could take it, Michael. It's an immaterial proportion of our financials it's about a percent of profits that were generating in the effective region here.

JB Perrette:

I would say in the Ukrainian market itself, obviously, it's absolutely the minimus is the short answer. In Russia specifically, as you may have remembered a couple of years ago when the regulatory regime changed in the country and we are obligated to restructure our agreements to actually be represented by a local player. We did that and to become in compliance with the local regulations. So we already have a deal structure in place that is partnered with a local Russian entity. And so, for the time being, based on obviously, this is a very dynamic situation based on everything that we've been able to study up until literally real time this morning, we don't see any impact, but we're going to continue to track it and see. And as Gunner said, even if you include the Russian market, it's still a very immaterial in respect to the total Discovery Company. As it relates to the larger European footprint. Obviously, for markets that are important to us, like Poland, like some of the Eastern European markets, which are the most likely to be affected again, for the time being, we haven't seen any impact. We're pacing very nicely for the first quarter, but that is a situation that is going to continue to evolve and we'll continue to track it.

Gunnar Wiedenfels:

No, Michael. It was a review of our accounting methodology here. Remember, this is purchase price allocation that we took on with the acquisition of Scripps. And obviously we review these on a regular basis. Obviously also spend a lot of time thinking about purchase price allocation for the upcoming WarnerMedia deal. And as such, this is non cash. It's what we paid for Scripps. And I just generally like to take as conservative as possible a position here and there is no benefit from having these intangibles on the balance sheet. So what's going to happen is, you saw a $200 million impact in the fourth quarter. But again, we're not changing the amortization period. We're just front loading the rate of amortization. So this is going to just increase the amortization of these positions for the next two or three years and then decrease the amortization in the outer years.

David Zaslav:

Thanks, Robert, next question.

JB Perrette:

Actually hold on, Mike. I should have - I didn't properly answer you Robert. I didn't properly answer your question, because you were also focused on content amortization. That's something we also obviously confirm on a quarterly basis and there was no changes to these policies last year. So again, you've got the linear world the potential further exploitation of content in the digital world. Those are sort of balancing each other out right now. So we haven't made any changes there and didn't see any need for that.

Doug Mitchelson:

Thanks so much. David and Gunnar, would you just talked about your confidence level in the $14 billion EBITDA and $8 billion free cash flow guidance for 2023. And if that confidence is evolved at all and why. And then, I guess the follow-up to that is should we look at that level of guidance, $14 billion and $8 billion as suggesting. You don't see a need to ramp content spending rapidly, which a lot of folks are worried about. That looks like a guidance that would suggest you're just going to continue along the path that HBO already had planned for their content spending ramp. So any correlation between that guidance and your intentions regarding content spending would be helpful. Thank you.

David Zaslav:

Look I think we start with the premise. That - the idea for this transaction was we have a library as big as Netflix with content that people love in the US, local content around the world, in the entertainment and nonfiction space and in sport, and that when we bring that together with the with HBO and the TV - the best TV library in the world, in my view and motion picture library, the first question is, how well does that do? We have a very low churn product in the US. Our churn is getting better in Europe as we've made it broader. And when we put these two together, I think it's the broadest, most compelling offering of content available and it appeals to from people very - form the kids that are very young to with Looney Tunes and Hanna-Barbera and Harry Potter to the DC content to - the content that that that older people and every generation loves. And we see that there's also a different viewing pattern between what's going on in HBO Max and with discovery+, a lot of our content is viewed throughout the day. So the first question is, how do we do when we come together? What happens to churn, what happens to growth? As I said, we are a real company. What I mean by that is, we're going to be generating $8 billion or more in free cash flow. So we have plenty of money to spend that already assumes that we're going to spend more money on content. But we're not going to just spend just to figure to have more content on the platform. The key to these platforms, which is true of free to air channels and cable channels is you spend enough that you could nourish an audience that they want to spend time with you and that they feel that you're - that you're the place that they want to be and you're important, low churn, high usage, usage by many people in the family. And we're going to be very careful about looking at how we do, and there's a good - we believe there’s chance that we're going to do quite well. And we also have very low cost content, and that we're not going to have to increase investment significantly that our bouquet will be differentiated and compelling. But we do have the resources if we see, that spending more will get us more growth and lower churn and good economics on ARPU. But we'll be very careful because we're we have a real company that's generating real value.

Philip Cusick:

Thank you. I wonder if you can talk about - just remind us how you think these days David of cost savings and synergies on Warner. Compare the difficulty and size of the opportunity versus those in the scripts deal anything changing there as you've gotten more into it. Thanks.

David Zaslav:

You know the - the short answer here is we're fully aware of the fact that this is much larger, and it's going to be much more complicated and complex than what we dealt with when we have brought Scripps and Discovery together. That said, in all the work that we have done again, as I said in my earlier response here, if anything, you have gotten more excited about the opportunity. We've had first very high level meetings with WarnerMedia side as well, that are going very well. And remember, we have a couple of unique points here at the constellation. One is that a lot of the cost saving is actually going to come out of cost avoidance. Right now we're running two completely separate, direct-to-consumer technology stacks of marketing operations. We're spending roughly $6 billion for technology and marketing between HBO Max and discovery +. Clearly, once we have successfully migrated those technology stacks in Q1, there is going to be tremendous opportunity to reduce costs. And the second point here is that for both plans we had anticipated very significant investment increases, which one of those ramps is going to go away as well, that could easily make up for half of the total cost synergy potential here. And then we have the linear portfolios, which I think we both sides have a lot of experience. And, you know, I've been encouraging people to go back and look at how, the efficiency change when we combine Scripps at Discovery. There's just a lot of very straightforward opportunity there. And then what I do want to point out is well is all the areas in which we have not assumed any cost synergies. Again, I've already mentioned content, but also the entire studio operation. CNN et cetera, et cetera. So again, I think what we're going to see is that we’re probably going to broaden the scope of potential initiatives once we close the deal but I feel very good about our ability to get these numbers.

Philip Cusick:

Forgive me if I'm premature on this, but there's been a lot of headlines about CNN plus ramping up, seems like there's a lot of business model overlap there with discovery+ anything you can add about that?

JB Perrette:

And Dave, I can just add one thing on the synergies. The other opportunity that is significant is the Warner International basic channels business is about ten times the size of revenue of what Scripps was. I think also the opportunity on the channel's integration on international to be much more significant than it was in the Scripps business.

Jessica Reif Ehrlich:

Thank you. Good morning, everyone. You're Gunner - you are on the cusp of closing the deal and the hard part is obviously in front of you. Given the changes you need to implement, where should we expect to see early results in revenue and costs? And maybe specifically the upfront in May? And seems like you'll close before then. The old Time Warner or Warner Bros traditionally had silos between entertainment, news and sports. Do you expect to go to market with all segments under one Salesforce? If yes, what are the pros and cons of doing that? And my follow up? I'll just ask now you called out the Olympic performance, which is clearly very different than the US experience. Can you talk a little bit about the lessons learned from the first two Olympics and expectations for Paris in ’24?

JB Perrette:

Yes look, I think, Jessica we've learned a couple of things. The focus, as David said, stay on the production side has been very much focused on content storytelling on local heroes and athletes. I think also, we've understood in this digital and social age that people want to see more authentic representations of the athletes' lives. And so we've also introduced things like Family Cams and showing particularly in this virtual world of last two games where a lot of the families have not been able to be on site, showing how their families and friends are rooting for them back home and bringing that and making it a more intimate authentic experience of the full representation of the support crew that supports these athletes. And then lastly or the last thing that say we've also continued to build out the best set of experts in terms of On-Air Talent in the business by far. So people know to come to us because we have the best set of On-Air Talent that oftentimes are medalists themselves, Olympians themselves. And then lastly, we really continue to invest in innovative technology to bring the games and the stories to life in different and innovative ways that are not gimmicky but ultimately really bringing the storytelling to life, augmented reality being one. We've done little simple things like our announcers being on camera and having feeds from - our announcers who have obviously a lot of passion as they're watching their national games. And so, we've continued to innovate on the technology, which has helped bring the game to life in a different way. And so we're incredibly proud of what our team has done, as David said, in a very difficult situation. And we're very pleased that both in terms of our linear ratings being comparable to what we saw four years ago, on Chung Chang despite the put levels in that period being down double-digit, that our experience was very different than others, obviously in the last - both this games and the Tokyo Games for that matter.

JB Perrette:

Jessica was asking about a little more on question. I think you've covered a lot of it, but any other thoughts?

Gunnar Wiedenfels:

Our objective is get the deal closed and implement these work streams on cost, and then sit down and look at the opportunity to serve advertisers more effectively and efficiently. And we'll have the upfront. Hopefully, we will be closed before the upfront. It looks like that'll probably be the case. And then we'll be able to start to put together an upfront strategy.

Michael Morris :

Two questions for me. First, David, you spoke about Warner Bros TV. And historically that's been a somewhat unique business and its size but also selling outside of the company. You referenced that being something you sort of expect going forward and in recent times, it feels like companies are trying to pull more content back in and perhaps in situations where they've sold externally. They've been disappointed with that decision. So maybe you just talk about the balance there given the size of the business, but also the interest in fueling your own platform. And a second question, maybe for Gunnar is really the long term margin structure for the business and thinking about the streaming industry more broadly. The guidance that you guys have given sort of implies a high 20% EBITDA margin which is below the historical cable business, but definitely the high end of the streaming business. So I guess the question is really, how do you see that converging over time, but also when you think of a sort of scale streaming business globally, what is its margin structure look like over the long term? Thanks, guys

JB Perrette:

And on the margin side, Mike. So a couple of points here. If you take a step back and look at the pure math, and if we look at a long-term horizon year and you’re looking at a 10 year projections that we saw in our - in our S4, you know, I think it's reasonable to assume sort of slightly declining margins on the linear side. And then we have all talked about DTC, reaching their peak investment point discovery+ as you know has peaked in 2021 from a investment loss perspective, HBO Max is guided to peak from that perspective in 2022. So, there will be very significant margin improvement in those businesses. You know, David described the macro tailwind for the TV studio, so that should be a positive as well. But if you take these underlying trends by business and then factoring that there's probably going to be a mixed change with DTC, obviously a growing significantly faster than I think that gives you a feeling for - how we get to this margin levels going to those levels that you see in the and the S4. We have said, when we launched discovery+ that we were confident to be able to get to a 20% margin at scale. That's where Netflix is a roughly today and the point that I want you to take away as well as I do think I've said many times, from today's perspective, I think we're going to do better than that 20% number and that is because we are very uniquely positioned. We're making through the combined company is going to be very uniquely positioned. We're making the content. We can decide flexibly where the greatest value is. We've got multiple bites at the Apple when it comes to monetizing the investment on our platform. And, again, we've talked about that so much, you know, we're virtually using every available revenue stream. In a way, we're sometimes double or triple dipping you know, monetizing content in our US linear environment, TV-everywhere. Discovery+ on the international side, basic pay then in certain markets, we've been very successful launch create air on top, and almost every dollar that JB spends on content is used both on discovery+ International and linear platforms. That's a huge advantage. Also the fact that we're getting subscription, distribution and advertising revenues. So I think we will always have an advantage with that global footprint when it comes to monetizing the IP investments. And again, as I've also said several times we're not going to be in a race here to win the spending war or to win a certain subscriber numbers. We're managing our business for the long-term, shareholder value, and that emerging all platforms at the same time.

Operator:

Your next question comes from the line of Brandon Nispel with KeyBanc Capital Markets. Your line is open. You may now ask your question.

JB Perrette:

We can start with the second one maybe Brandon. So I think on the Discovery Plus Churn numbers, I think we don't talk about specific numbers, but I can tell you this, which is David has alluded to I try to separate the US and international. The US, one of the greatest things we've experienced over the course of the last year is that compared to the best in class in the market, that our numbers are not quite there yet, but looking very competitive with some of the best in market and that's the reality is only twelve months out of the gate when our product and all the elements of our product, both in terms of engagement and retention capabilities. I would say right now it's still not certainly even on par with some of the best in market yet. So we feel great about where we are, one year out being in the same zip code as some of the best in market. And then internationally, I think we've been much more challenged candidly, historically. And as David said, part of the issue was that our platform wasn't as sophisticated because it came from a legacy pre-Discovery Plus launch in the US front end that didn't have nearly the tools for personalization profiles, really basic things that we couldn't enable. And by completing that re-platforming at the end of last year, we came out of 2021 with record lows on churn internationally, still higher than the US. But the great news is the trend we saw towards the end of the year and into the first quarter is very promising. And a big part of that we think is going to continue to improve by just having the product features that have been available in the US now available to us outside the US. And as the proposition and as the product features continue to improve over the course of the next couple of months, we think there's opportunity for those numbers to come even lower. So hopefully that gives you a little bit of a flavor.

Gunnar Wiedenfels:

On the advertising point, I mean, obviously, you'll understand we can't talk about sort of specific plans here for the combined company, but I do want to give you a couple of general points and then one deal specific point. So number one, just generally speaking, there's no doubt that ratings across the ministry are under pressure, so we have less inventory. We've continued to grow for a number of reasons. And I have every reason to believe that we're going to continue to grow with this lineup. Number one, and we don't have to go through the details again, but cable has always been under monetized in a major way. David has been talking about this for years. We're finally seeing some real traction as people sharpen their pencils. It's just a great deal to spend 30% less than on broadcasts on our networks and we can still double our CPM. And we've talked about that a lot. Targeting, even in the linear space, dynamic ad insertion at this point has passed the point of just pilots and testing. There's an opportunity there. And then finally, as we look at digital with eyeballs sort of moving out of the linear ecosystem into a direct to consumer ecosystem, we're getting as we laid out in our presentation when we launched discovery+ up to 3x CPMs, because we're covering more demos and age groups get better targeting et cetera, et cetera. So, there's a lot of monetization opportunity left in that traditional business. The deal, specific point that I do want to make is, what we learned when we combined Discovery and Scripps is and you go back and look at the number in virtually every market globally. We were able to get much better rating out of the existing content output because we were optimizing - suddenly we're able to optimize across a portfolio of networks. JB was able to launch new networks and reprograms networks internationally. We did very significant programming changes across the combined Scripps and Discovery portfolio in the US. So we were able - if you look at the ratings trends, to outperform the industry on a global basis for several years following that combination. And I think that's a general theme, which I would hope to get some traction out of when we combine these two kind of fantastic portfolios as well. So, I really feel very, very positively about the app sale side with the caveat that obviously, no one is expecting any viewership growth in this day and age.

Jason Bazinet:

So you guys have such a great track record in international markets. I just had an international DTC question if you ask the buy side a year ago how big the opportunity was, they would have said 800 million or a billion households. If you ask the buy side now they give you a number that's like one third of that because some of the bigger players are seeing decelerating that ads and I just - I know you guys have sports and news and a wide array of content, but what's your view of what that number is and what will it take to sort of deepen penetration outside the US. Thanks.

JB Perrette:

And as David said, but that strategy is not just a theory. That's the same strategy that led us in Europe to get into free air over the last 10 years, where pay-TV was penetrated up to in certain markets only 20%, 30%. So 60%, 70% of the market was never going to be interested in paying for television and with David's vision at the time that the group went out and started launching free-to-air and we ended up developing a whole new audience segment at, 20% in some cases 30% margin businesses in the free air. That model may eventually migrate to kind of what we call free-to-view. It moves to digital, but we think that's another alternative way, but we want to go after every customer segment with slightly different product offerings in each one and we'll have the content depth and breadth to be able to do it when you look at the combined company.

Gunnar Wiedenfels:

All right. Jason, if I could just add one point from the perspective of just achieving long-term sustainable growth. You know, remember that while the international markets have more ARPUs and you're probably going to see some of that impact over time as international subs sort of increase in the mix here for us. It's, it's a multiple, relative to what we're getting, you know, in the linear world and on a per sub basis, and we're also able to address a much, much broader part of much larger share of the of the total population. Some of the markets in a traditional pay ecosystem are limited to 15%, 20%, 25% of the market. So that's why you're seeing us continuing to grow through this transition.

Kutgun Maral:

Good morning, and thanks for taking the questions. David, you said in your prepared remarks that your goal is to compete against leading streaming services and not to win the spending war, as you know a lot of the leading streaming services are ramping their spend levels more and more and on your end, I think Gunner, you even hinted at the fact that there may even be some content spend deficiencies than you previously expected. So I don't mean to belabor the point, but it's just top of mind for so many investors. So I'd love to get your perspectives on what gives you confidence that the DTC spend levels embedded in your targets remain appropriate in what seems like an increasingly competitive streaming landscape, and I guess at the core, I am just trying to better understand how much of an internal priority there is to hit the 14 billion in EBITDA and drive significant free cash flow versus maybe some flexibility for incremental streaming investments to better position the company to become a longer term leader in the space. Thanks

JB Perrette:

No, I think you've said it all, David and to the point about priorities. Our priority is on making the right decisions and leaving no opportunity untouched. But we will make those decisions, as David said, in the interest of long term value for the firm here and long term sustainable growth. So that's all I can say. But we will definitely touch every opportunity.

Andrew Slabin:

Good morning, everyone and welcome to Discovery 's Q3 earnings call. With me today is David Zaslav, our President and Chief Executive Officer. Gunnar Wiedenfels, our CFO, and JB Perrette, President and CEO of Discovery Streaming International. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the Company's future business plans, prospects, and financial performance, as well as statements concerning the expected timing, completion, and effects of the previously announced transaction between the Company and AT&T relating to the WarnerMedia business. These statements are made based on management's current knowledge and assumptions about future events and about 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 end in December 31, 2020 and our assessment filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Gunnar Wiedenfels:

Thank you, David. Good morning, everyone, and thank you for joining us today. Reiterating David 's comments, I'm pleased with what the Discovery team has achieved since the Discovery+ Analyst Day not even a year ago. Over that time, we have added 15 million paying direct-to-consumer subscribers globally, finishing the third quarter with 20 million paying BBC subscribers. Since the start of our Discovery+ journey, we have launched an over 25 new markets, notably the U.S. and the UK. And most recently Canada and the Philippines. With Brazil to come over the next few weeks. At the same time, we have continued to drive growth in markets like Poland, the Nordics, Italy, and India, where we doubled down on our direct-to-consumer efforts with a renewed and expanded content offering. I know our next-generation revenues finished the third quarter with $425 million for the quarter or a $1.7 billion annualized run rate with global D2C ARPU of approximately $5 and $7 blended Discovery+ ARPU in the U.S. Again, supported by our over $10 ARPU for the Discovery+ Ad Lite product, which continues to monetize very well. Investment losses for the quarter were in the low $200-million range, slightly better than our guidance from last quarter. And we expect investment losses more or less in that range in the fourth quarter as well. As always, we maintained a disciplined approach with respect to investing in direct-to-consumer initiatives. As both David and I have noted over the last few months, it is through this lens that we view the opportunity ahead, both leading up to the marker and beyond. We are very focused on nourishing our existing subscriber base with an increasing content offering and new product features. At the same time, you should expect us to be guided by a rigorous analysis of customer lifetime value at subscriber acquisition costs to determine our marketing spend for new sub additions. And now I'd like to quickly review our reporting segments. Starting with the U.S., third quarter advertising revenues increased 5% year-over-year. Pricing was healthy versus last year driven by scatter pricing that was up 40% year-over-year. Additionally, we continue to see strong demand for our Discovery+ ad light product, which contributed to the growth in the quarter. This was partly offset by weaker audience delivery year-over-year. Some of it attributable to the Nielsen panel issues, as well as the lapping of our very strong performance last year during the pandemic. Furthermore, some of our networks have lost share to the strong sports calendar this year. While scatter pricing is still very healthy in Q4, up 30% to 35% over both upfront and last year, the overall tone in the market is a bit more subdued than last few quarters as clients worked through the constraints in the global supply chain. And though there is slightly less visibility as a result, we are very pleased with how our portfolio is positioned based on the strength from the upfront and contribution from direct-to-consumer. Distribution revenues increased 21% year-over-year, largely due to the continued growth of Discovery+ as well as linear affiliate rate increases, in part, helped by successful renewals with DirecTV, Verizon, Hulu, and [Indiscernible] so far this year, As disclosed in our earnings release, Pay-Tv subscribers to our fully distributed linear networks declined by 3% year-over-year, while total portfolio linear subscribers declined 4%, excluding the impact of the sale of our Great American Country network last quarter. Turning to international, which I will as always discussed on a constant currency basis. International advertising increased 26% versus last year as the global advertising marketplace continue to recover from the pandemic. We also benefited from the Olympics in Europe across our linear and digital platform. Although as we've noted in the past, advertising for the Olympic Games is less consequential in Europe as compared to the U.S. All of our international regions, including many of our key markets like the UK, Germany, Sweden, Norway, Spain, Australia, and New Zealand, and Mexico were up meaningfully compared to last year, as well as compared to 2019. We see momentum continuing into Q4, even as needless to say, the year-over-year comps get tougher from here on out. International distribution revenues grew 6% during the quarter, primarily due to the growth of direct-to-consumer subscribers, which have nearly tripled over the past year across our footprint outside the U.S., in part aided by Olympics sign-ups. Turning to operating expenses, total Company OpEx increased 50% during the quarter, or 17% excluding the Olympics, for which the overall EBITDA losses were in line with our guidance of around $200 million for the quarter. We continue to focus on driving efficiency in our core linear networks, and we remain on track to reduce core linear OpEx in the low to mid single-digit percentage range for the year. Turning to some housekeeping items, net income for the quarter was $156 million or $0.24 per share on a diluted basis. A couple of items to note. First, we recognized a 12-cent per share, non-cash gain from the $15 billion of notional interest rate hedges that we recently implemented to mitigate interest rate risk for future debt issuances to finance the cash portion of the WarnerMedia transaction. The hedges provide additional security and visibility towards our overall cost of deal-related debt financing, which is now trending better than our initial expectations. And a final note on this, as the derivatives do not qualify as hedges for accounting purposes, we are required to report the changes in fair market value on our income statement, which could result in some additional variability to our net income until the WarnerMedia transaction closes. We will of course, call this impact out each quarter. Second, the impact of the PPA amortization during third quarter was $0.30 per share. Adjusted for the above, EPS would have been $0.42 per diluted share. Our effective tax rate during the quarter was 15% and we continue to expect the full-year effective book tax rate to be in the mid-teens range. For cash taxes, we continue to anticipate a rate in the high 20% range for the year, excluding PPA amortization though this is subject to change as we are carefully monitoring ongoing tax legislation. And we expect FX to have roughly a negative 15 million year-over-year impact on revenues and a negative $10 million impact on AOIBDA in the fourth quarter. Now, turning to free cash flow and our leverage. We generated $705 million of free cash flow in the quarter. Obviously, a very strong conversion rate of AOIBDA, notwithstanding the continuing investments we're making, as well as the return to normalized content production levels. Year-to-date, our AOIBDA to free cash flow conversion rate is over 60%. And with a few months left in the quarter, we see free cash flow topping $2.1 billion for the full year, and clearly ahead of our 50% conversion guidance. And to expand on a point that David made earlier, we now expect our net leverage to be at or below 4.5 times by the time we close the WarnerMedia merger. Over the past few months, having had the opportunity to dig further into WarnerMedia 's draft carve-out financials, and with better visibility on estimated working capital, in conjunction with our better P&L and free cash flow performance, we now believe that we will have a healthy amount less net debt at closing than originally anticipated. While naturally, these metrics are preliminary and a function of working capital up close, we now do expect to be in a position to reduce leverage to 3 times meaningfully sooner than what we stated in May. Our long-term target net leverage range for Warner Brothers Discovery remains at 2.5 times to 3 times. As we work towards closing the WarnerMedia transaction in mid-2022, we have re-erected our experience, integration, and transformation office to hit the ground running. And as we refine our strategic review and integration plans, and as we develop our synergy capture plans further, we are as enthusiastic as ever about the prospects of combining these two world-class portfolios and franchises. With that, we look forward to sharing a lot more in due time. And for now, I would like to turn the call over to the Operator to start taking your questions.

Andrew Slabin:

Doug?

Doug Mitchelson:

Okay.

David Zaslav:

He only responds when he is addressed as Mr. Doug Mitchelson. Okay. Sorry, Doug.

David Zaslav:

Thanks Doug. First, this is something John Stankey and I talked about us. We created this vision together of this Company being what we believe is the best media Company with the greatest and most comprehensive content offering. And as part of that, we're spending more money on content and leaning in. And WarnerMedia is spending more money on content and leaning in. We both committed to do that to keep both of our ecosystems nourished and strong and growing. So, when the deal -- when and if the deal gets approved, then we come together, we'll come together with strength. And you see that with on the Warner side where we're cheering them on with the success of Dune around the world with Ann and Toby on that side and Casey Bloys having an incredible run at HBO with Succession, Light Lotus, Hacks, Mare of Easttown. It's just if you look at the culture and the impact of that content, together with the extraordinary library they have, us leaning in on our side with more original content. And so, for us, we're also spending a lot more on the international side to get ready. We think that's a strategic advantage. And when you look at the content, we think in terms of the demographics that we will appeal broadly to every demo. I mentioned this, but it's very strong with women. That's a particular strength of Discovery where we're during many quarters with a leading media Company in America for women. Together with length of view of women watching our channels. Whether it's Food or HG, or Oprah, or ID, and TLC and that's continuing. In addition, we look around the world, it's not just local content, but we're the leader in sports in Europe. They have sports in Latin America. And CNN is the leader in news with the most compelling news brand around the world and one of the few global, maybe the only global new service, that has the kind of resources around the world in news gathering. And so, as we go out and build this service and make this offering, and I do think it's the best content wins, there's a great product in Netflix, in entertainment, there's a great product with Disney, with Chapek (ph) is building, with entertainment. And we think we have a comparable product, maybe even more diversely attractive in entertainment. But on top of that, we also have sports, which we're using in Europe and learning a lot from. And in markets like Poland, where we're doing news and sports together with broad entertainment and nonfiction, we're finding real meaningful traction and real reduction in churn. And so, I think we have a lot to learn, but we have a terrific product. And we're working on our go-to-market. We have brought on an old friend of mine, who I've known for 15 years, one of the most talented people I think in the business. He's busy with a lot of other things, but we do have a commitment now that Kevin Mayer, who built Disney+, will be in the car with -- as a consultant with JB and I and Bruce and Gunnar and the whole team. As we've already built, as we've talked about a go-to-market strategy. We're going to be honing that. Kevin has a big brain. He's learned a lot about this. We've learned a lot in Europe and with Discovery+. We've been at it for a long time. But he had a lot of success at Disney. He's super excited about getting in the car with us and helping us with everything that he's learned. A lot of knowledge about windowing, about so, how different pieces of content, whether its movies perform. We're anxious to get in a room with Anne and the team at Warner. I was there last week meeting for the first time with Anne's whole team, but they're super smart over there. And so, we think adding Kevin to the overall team is going to be helpful to us. And off we go. I they -- who's got the best menu? I think we got the best menu.

Doug Mitchelson:

Great. Thank you, both.

John Hodulik:

Hey, guys. Thanks. A couple of quick questions on advertising. Obviously, a lot of sort of trend going into the fourth quarter, you got the step-up from the upfront, but potentially some slowdowns in supply chain issues. Dave, is there any way that you guys could sort of characterize what you see going forward on that side and maybe breakout what you're seeing in terms of the linear business versus the DTC business. Thanks.

Gunnar Wiedenfels:

It's fine. I don't really have a lot to add to that, David. We're feeling very, very good about our position, the upfront, the continued contributions from D2C. But I did want to point out a little less visibility and for known regions. But we'll be growing very healthily in the fourth quarter, I believe, from today's perspective.

Operator:

Your next question is from the line of Jessica Reif Ehrlich from Bank of America. Your line is now open.

David Zaslav:

Okay. Let me start by saying, look, I don't think we're missing anything. And the first thing we're going to do is look to drive all the tremendous assets and the differentiated IP and the great library and local content that we have. Pull it all together and go to market. We think we have something quite strong. I'm just making the point that there will -- given that we are going to be delivering quicker, given the fact that we're -- we will be much lower levered than expected. That over time, as others are struggling that there will be an opportunity for us to look at IP and to see where we need more help if we need more help. On the integration side, we're really lucky. We got two big tenpoles here

Jb Perrette:

Yes [Indiscernible], it's obviously a big opportunity for us. We look at it as one where we're undergoing right now, essentially an audit of both platforms. And I don't think necessarily the decision as monolithic one. We look at these as multiple different modules that make up all the different components of both their and our tech platforms. And we have a lot of experience, as you mentioned, in terms of the effort and the work and the discipline required in re-platforming either one to the other -- in one direction or the other. That decision we haven't made yet, but we're undergoing obviously, a significant diligence process to underscore which is the best in class on both. And it may be a little bit of a combination of those depending on certain modules in the platform that we may apply. And so we think it's actually a great opportunity, because Rich and Jason and the team on their side have obviously spent a lot of time and are investing a lot in upgrading their tech platform as we speak. We've obviously spent a lot of time and a lot of money doing the same over the course of the last 12 to 18 months. And as the 2 groups come together, we will have essentially a choice of a what we think will be an incredibly attractive kind of tech buffet that we will look to make the best of both to decide how we move into a common platform going forward.

Jessica Reif Ehrlich:

David was really clear. It just gives you opportunity. And but just maybe, I just wanted to follow-up on the -- does it take a lot -- you've gone through this as you said already, with Stemtech, can you just talk a little bit or give us any color on what the cost savings will be from combining and what the benefit are from having one platform?

Gunnar Wiedenfels:

But maybe if I can add one thing, Jessica. What we said when we first announced this deal was remember there's roughly $6 billion in technology and marketing spent between the two platforms. We're assuming growth. We brought together two companies with significant expansion plans. A lot of that spends is, by its nature, a fixed cost relatively independent of the subscriber number. Obviously, there's a streaming-related cost that's there, but a lot of it is fixed. And so, there's a huge opportunity to completely to duplicate that spend base. And to JB 's point of multiple waves, especially on the marketing side, I have no doubt that we will, out of the gate, even in the first phase before fully aligning tech platforms will be able to get a lot of leverage out of the combined marketing spend.

Operator:

Your next question is from the line of Alexia Quadrani from JPMorgan. Your line is now open.

David Zaslav:

Thanks, Alexia. One of the real advantages of Discovery is for 20 years, we've been in-market with local teams selling locally, producing local content throughout Latin America, throughout Europe. In Europe, we expanded into free-to-air in a number of markets where we're the equivalent of NBC or CBS. In some markets, we're the equivalent of like NBC and CBS combined. In Northern Europe and Poland, we're quite big with number free-to-air channels in Italy and Germany. And we have a library that's meaningful in each of those markets. And we have a lot of data on what people are watching. We have a good sense of what kind of content they're looking at on the direct-to-consumer platforms because we've been at it for a long time. We also have sports in Europe. And we've tried a lot of things, some haven't worked out as well as we'd expect. And that's a good thing because we've learned that sometimes packaging the sports independently doesn't work as well as packaging it more broadly. Number of sports together, reduces the Churn significantly makes the appeal higher. When you put sports together, with entertainment together with non-fiction, we came out with the Olympics. We had a million-plus sign-ups for the Olympics. And so, we continue to learn. That's a good thing. We're continuing to invest, learn, and grow. That's what John, and Jason, and Ann e, and the team is continuing to do on a parallel basis independently. But as we come together, we'll all be smarter. You look at what people thought about windowing of just as a student of this and the meetings I'm having, what's the right window in strategy? What works best for direct-to-consumer product? Is it better to have to build up a movie in the theater and then bring it? Is it stronger on the platform if it goes day [Indiscernible] Is it stronger if it goes day? [Indiscernible] at $30 versus free? There's a lot that we are learning just as observers. And there's a tremendous amount that Jason has learned and Ann and Disney has learned and that the industry has learned. And one of the great benefits for me is I have this ability to really listen. And also, this has been a great experiment in how people are consuming content. And when people come on for a movie or series, how -- what's the reaction? A lot of what is on the Warner side, I haven't seen, because at this point, we can't see it. But the general industry knowledge and trends are things that we're noting aggressively and we're learning from, and we're continuing to experiment in Europe. On the news side, we've been experimenting ourselves. And in Poland, we went independent. Now we're packaging it together. I think it's going -- it is probably going to depend on the market and it depends on the offering. We have a very, very strong service in Poland and it's been very helpful to us. We're one of the leading voices in the market, and we have a 24-hour news channel there that's quite compelling. We don't know what's the right answer yet. But having news and sports -- news is some -- the more people go to a direct-to-consumer product, the lower the churn. The more time they spend, the lower the churn. It's why we're so excited about how much time people are spending with Discovery +, which has a library that's being broadly viewed. And the idea that people spending hours on that product and the churn is low is encouraging for what bodes for the combination of the two. But as people, if you could put news or sports and people also go regularly for that, it's another reason to have the service. It's another reason the value the service. It's another reason not to churn out of the service and Disney has been very effective in doing packaging of services. We don't put them together, bundling. And that's the current plan right now for CNN, as we've read about it. And so it's exciting and we'll look and see.

Operator:

Your next question is from the line of Kutgun Maral from RBC Capital Markets. Your line is now open.

Gunnar Wiedenfels:

Great. Thank you, Kutgun. Let me start with the delivering piece here and give a little more color. Again, the -- there are two things that we have updated. 1 is sort of our model of how we look at pro forma combined in financials for the Company, and number 2 is just flowing through our current performance, and that's, by the way, linked to your first question as well because we're just doing a lot better and we're generating a lot more free cash flow than what we anticipated half a year ago. But if you take a step back, the challenge here is that WarnerMedia is not a standalone Company, but is a carve-out group. We obviously made certain assumptions about what the balance sheet of that Company and carve-out group would look like, but had to wait for some still draft carve out financials to get full confidence in the financial setup of that combined entity. And accordingly, what we put into our model and what I presented to rating agencies for the rating discussion was a conservative model not fully flowing through certain adjustments. The most important, one of which is the working capital adjustment. So, we have always talked about the $43 billion as subject to adjustments. And that's the working capital adjustment from today's perspective that looks like it's going to be $4 billion, $5 billion lower in terms of what the net payment is going to be will have an impact on the net debt balance that we're going to start this Company with. And then, that has obviously a very significant impact on leverage. So, the second thing though, is about 25% or 30% of this improvement here is just driven by our better operating performance. Obviously, better OIBDA improves the denominator of that leverage equation, and that's developed very nicely as well. And I do want to caveat this. As we said right now, it looks a low 4.5 times. This number is going to move around with working capital. But what's not going to change in my view is the very significantly increased confidence that I have in our ability to very, very quickly deliver below the 3 times and the very quickly get us into the long-term comfortable leverage target range. And, again, the other point I want to keep pointing out is we have already got a lot of questions on this. We have already dissipated very significant re-investments in our business case. To your first question, on the D2C investment, I'll let JB talk about some of the opportunities a little more because we do have, obviously, the Olympics is coming up and market launches kicking in here. But you're right in general. We've always looked at and we will continue to look at capital allocation through the lens of risk and return. The return side is almost fairly easy in this space because it's just the relationship between customer lifetime value and subscriber acquisition costs. And it is fair to say that -- ask the marketing teams to give us a bit of more cushion between the 2 in order to manage some of the uncertainties as we go into the scenarios for next year. So you're right, we should see lower investment losses, especially if you keep in mind that the beginning of next year we're starting to comp against the various significant investments that we made in the first quarter of 2020 as we launched the U.S. product. At the same time, I also do want to point out we're continuing and as David said, we're continuing to really nourish the existing subscriber base that we have. We're continuing to invest in content in a significant way. So keep that in mind as well over the next few quarters. We will continue to see content expense coming up. We're also continuing to invest in technology and product features. But just a little less focus, I would say in the mix on necessarily driving for every last subscriber. JB?

Kutgun Maral:

That's great. Thank you, both.

Rich Greenfield:

Thanks for taking the question. A few months ago, WarnerMedia left behind its own channel platform. I think they've joined Disney, Netflix, Hulu, even Apple TV Plus. [Indiscernible] we're just looking at [Indiscernible] they were just looking at the DTC subscriber business and wanting to be in a fully direct relationship versus sort of a whole down relationship with Amazon. But I think that's sort of puts Discovery by common stars as sort of the 3 largest players on Amazon channels. Again, sort of David, your perspective big picture hasn't been about the puts and takes of Amazon, whether going fully independence is something you can see Discovery's future, or whether you think companies like WarnerMedia had been in the state not working with Amazon channels and just be curious how you think about that and then just lastly, including calendar on Varick, are you planning on keeping more HBO Max, and Discovery+ separate with that sort of the bundling comments you were making or is that decision of integration still not made. That would be along faster.

Jb Perrette:

I mean, Rich, on the channel store question. The reality is they've obviously been a very good partner of ours on Discovery side. We're well aware that as you said, HBO is taking a different position. I think the 3 questions that we'd have that we are waiting to engage further with the HBO side is

Operator:

Your next question is from the line of Steven Cahall from Wells Fargo. Your line is now open.

Gunnar Wiedenfels:

Great. Steve, yes, l'll start with the flexibility. As I said, in my prepared remarks, I am very convinced from today's perspective that we're going to hit that upper end of our target range of three times earlier than we originally mentioned. And it is the 2.5 to 3 times range that I want to see going forward. And to your question about flexibility, we don't need flexibility because our deal model already assumes very significant reinvestments and further investments in building out the DTC product and growing content expenses over the five-year term here that we have modeled. So clear answer is yes, very, very hopeful that we will be hitting that upper end of the 2 to 2.5 to 3 times range earlier. And regarding raising debt, again, we've mentioned the $15 billion hedge that we have put on. And pretty much in line with what I said earlier about the conservatism in our initial model. The answer is yes, there is some room. We have obviously taken some conservatism as well as we modeled out our interest rates, We've, we've locked in very attractive rates with this $50 billion hedge program. Again, I don't want to make any promises, we'll -- it still will be some time before we implement the financing, but a good part has hedged now. I will have to monitor the spreads as well, but I rates, believe that we're in a very rate, comfortable position relative to what we put out in the original statement and in our deal models. And before I hand it off to JB for the subscriber outlook here, the financial part of that question is you should absolutely assume further free cash flow performance here as we move forward. I do want to have the balance sheet in the best possible shape as we come up on closing the deal. And as I said earlier. I now have explicitly guided to at least $2.1 billion of free cash flow, so it's a significantly higher conversion than what we went into the year with and what we guided at the beginning of the year. And that's all part of our ambition here

Steven Cahall:

Great. Thank you.

Operator:

This will be our last question from the line of Ben Swinburne from Morgan Stanley. Your line is open.

David Zaslav:

Thanks. Len Blavatnik is a very old friend and he's out he is he worked with me and Kevin and providing the opportunity for us to get a good amount of Kevin's time. But he is fully committed to LAN and the zone and he's doing some other things as well. He's driven down all these paths. And he's a great entrepreneur and he's got a number of really exciting things he is doing and working on. This is one of them. And I think it's going to be really helpful to JB and I and Bruce. And he's is having a great time doing what he's doing, but he's super excited about really coming in and giving us the full scope of his experience and brain on everything he's seen and learned. And working with LAN has been a good thing. I think he's seen and learned more about Europe and sports and -- so I think that's exciting. The team at Warner and the way they're growing, the knowledge, the capability there, the attack plan that they have is really impressive, and the [Indiscernible] super strong. If you look at the strength of that product, you look at the strength of our product. So, I think, we've got a lot of really good people. You've seen through the hits for our history with Scripps that we're really about who are the best people. I think we're going to have -- be able to build a really strong team and bring in some outside experience as well; but it's really encouraging how well they're doing and what we are learning along the way, and that's a big helper to us. On the affiliate side, Gunnar, you could fill in some more. But I think we reached deals that were very favorable for us on the carriage side, very strong. And I think it's win-win. They want to commit to carry all of our channels. And this whole idea that a bunch of our channels are going to get dropped, that never happened. They're good value. I don't say that with great glee, but when you look at the overall package and, on the viewership, we're a great value. And they're making a lot of money selling our -- selling advertising on our services. So, it went very well for us with meaningful increases and real security and I think well for them and continuing to get really good products. And in terms of how do we, how does this align with Warner has nothing to do it. We're operating as an independent Company. And we're operating on the strength of the channels that Kathleen Finch and Nancy have been building here with Discovery, and Oprah, and Food, and HG. And so, we've been over-delivering. People love our stuff. And it's just a reinforcing of this narrative that despite the fact that the world is changing, that we were able to get deals with some of the toughest and strongest and most knowledgeable distributors on very favorable terms with strong carriage commitments, as we make this transition together, and so I think that's a very good sign for the two sides. Gunnar, anything to add?

Ben Swinburne:

Great. Thank you.

Andrew Slabin:

Good morning everyone. Thank you for joining us for Discovery's Q2 Earnings Call. Joining me today are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perret, President and CEO, Discovery Networks International. You should have received our earnings release, but if not, 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 today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance, as well as statements concerning the expected timing, completion and effects of the previously announced transaction between the company and AT&T relating to the WarnerMedia business. These statements are made based on management's current knowledge and assumptions about future events, and 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, 2020, 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.

Gunnar Wiedenfels :

Thank you, David, and good morning, everyone. Thank you for joining us today for our second quarter earnings call. Echoing David's Comments, I am very pleased with our operating performance this quarter, in with both our traditional core linear business, alongside our next-generation streaming platforms combine to deliver very healthy revenue growth and impressive AOIBDA and free cash flow conversion. While comparisons against last year's advertising performance were very favorable, we’re especially encouraged by the acceleration and sequential improvements we've enjoyed from every region around the globe and returned to near pre-pandemic levels in the U. S., Latin America, EMEA and Asia Pacific, all turned an impressive results and of course, discovery+ is providing a nice tailwind to our performance. Turning to second quarter results, beginning with the U. S segment. Advertising revenues increased 12% year-over-year, as we continue to take advantage of a very low robust advertising market for both linear and digital inventory. We saw strong demand in all key categories including CPG, pharma, cosmetics, auto, retail, and home improvement, far more than offsetting the softer viewership across the industry, as compared to the peak COVID Q2 of last year. Scatter CPM dropped 50% plus versus last year's upfront at up 130% year-over-year. Additionally, next-generation advertising demand was very healthy across our suite of products with revenues up 70% year-over-year. Specifically, for discovery plus, more than 800 advertisers have now bought inventory on the platform, more than 4 times the number of advertisers that we had targeted by the end of the second quarter. Interestingly, more than 90% of all clients who have bought inventory in discovery+ also bought inventory and our Go and TV Everywhere offering underscoring the power of integrated audience solutions across our suite of digital products. Furthermore, we continue to roll out new ad products on discovery+. For example, we recently launched Green Lives, an ad product that allows clients to own the first ad served to every user on discovery+ on a specific day. As noted earlier, the strength the upfront market under the continued relevance and importance of television as an advertising media contributing to greater confidence in our ability to drive top-line advertising revenue growth. While we face comparisons against political advertising in the second half of the year and some modest headwinds from the Olympics here in the U. S in Q3, layering in the tailwind from this upfront, we should enjoy sequentially faster revenue growth in Q4 over Q3. Distribution revenues grew 12% year-over-year on a reported basis or 18% like-for-like, primarily driven by continued traction in monetization of the Discovery+ subscriber base helped by linear affiliate pricing, offsetting the year-over-year decline in Pay-TV subscribers. Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio subscribers were down 7%. However, recall that we sold Great American Country during the quarter. When adjusted for this sale, total portfolio subscribers would have been down 3% year-over-year during the quarter as we continued to benefit from specific distribution gains across certain networks from recent new awards. We will begin lapping those in the coming months and you should expect to see our linear subscriber trends more in line with the industry going forward as we have discussed prior. Worth noting also is that the sale of GAC did result in a modest headwind to both reported advertising and distribution revenue this quarter as we did not recognized any contribution from our partner so far. Turning to the International segment, which I will as all discuss on an ex FX basis. Advertising revenues increased 70% year-over-year as we saw significant growth off the second quarter last year. We saw strong revenue growth across all regions with the pace accelerating throughout the quarter with a number of key markets nicely above 2019 as David mentioned. Distribution revenues increased 6% versus the prior year, supported primarily by direct-to-consumer subscriber growth. So as noted, there were no material new market launches during the quarter. This was partially offset by lower liner affiliate rates in certain European markets. Total company operating expenses increased 33% during the quarter. Cost of revenues increased 25% year-over-year, as sports returned to a more normalized schedule this year versus virtually no sports last year due to COVID-related shutdown, as well as the continuing investment in B2C content. SG&A increased 43% versus the prior year as we invested in marketing and personnel to support our discovery+ roll out. We continue to focus on driving efficiency in our core linear networks and we remain on track to reduce core linear OpEx in the low to mid-single-digit percentage range for the year. As we guided, we reduced our losses from investment projects significantly in the second quarter to roughly $250 million versus more than $400 million in the first quarter, benefiting from both strong next-generation revenue growth, as well as more efficient marketing spend, primarily in the U. S. Q2 next-generation revenue growth of 130% to annualizing at the $1.6 billion runrate and we expect additional sequential quarterly revenue growth through the year and beyond. As we launch in new markets during the second half of the year, we expect that we will continue to incur investment losses fell more or less in the same ballpark this past quarter, mainly driven by content and marketing costs. We continue to expect that investment losses will peak this year. Overall, we remain very pleased with all of the core KPIs we closely monitor and we continue to attract well against our internal plans. Global direct-to-consumer ARPU remains consistent with Q1 as the impact of certain international partnerships and associated early promotional activity is offset by our strong and growing U. S. ARPU, which is nicely supported by the ad live discovery+ product. Roll to pay still remains high at an average of close to 80% across the global B2c portfolio. As the averaging base of per viewing subscriber, which is more or less in line with what we saw last quarter, as well we remain pleased with overall churn, which naturally is at the lower end for the most the mature subscriber cohorts and skews higher for the most recent ones. As I noted, the vast majority of our international discovered+ sales thus far has come from existing markets. And we plan to launch in a number of key markets and territories during the second half of this year, including Brazil, Canada, and the Philippines, alongside the additional Vodafone launch in Italy, The Netherlands and Spain around the end of the year. It is worth highlighting that a handful of these market launches have been extended out about a quarter or so later than our original internal plans call for, primarily resulting from the requisite harmonization of our technology platforms, the added benefit of Rich will enable us to roll out at international ad live products. This has been a heavy lift, particularly, given team constraints related to COVID in our tech hubs, primarily in India. Other puts and takes to consider will be our ability to maintain and keep subscribers that come in during the Olympic games though the initial roll to pay numbers was very encouraging. Net-net, we remain very excited about our local go-to-market strategies across these important countries through the end of the year. Turning to house housekeeping items. Net income for the quarter was $672 million or $1.01 per share on a diluted basis. First, please note, we recognized a $0.09 per share gain on the sale of Great American Country as well as a $0.09 per share non-cash gain on an existing investment in Sharecare, the company that recently went public. Second, our effective tax rate during the quarter was negligible as we recognized certain non-cash cash tax benefits totaling $162 million or $0.24 per share. Given these tax benefits, we now expect the full year effective book tax rate to be the mid-teens range. For cash taxes, we are now anticipating a slightly higher rate in the high 20% range for the year, excluding PPA amortization, as we are positioning our tax footprint for optimal outcomes across a number of legislative scenarios for 2022 and beyond. Third, and finally, the PPA impact was $0.30 per share. Adjusted for the above, EPS would have been $0.89 per diluted share. Now, turning to free cash flow and our leverage. We generated $757 million of free cash flow in the quarter, representing a near 70% conversion rate of d AOIBDA, notwithstanding the continued investments we are making, as well as the return to normalized content production levels. Year-to-date, our AOIBDA-to-free cash flow conversion rate is nearly 50% and we remain confident that we will convert at least 50% of our AOIBDA to free cash flow this year even with the anticipated new market launches and slightly higher cash taxes mentioned earlier. At the end of the quarter, our net leverage was three and a quarter times, which is within our current target range. We expect our net leverage could be temporarily at the high-end of target range due the Olympics in the current quarter. As a reminder, we do expect to recognize $175 million to $200 million of AOBIDA losses during the third quarter, as a result of the Olympics. So we continue to expect that we will break-even or generate slightly positive AOIBDA and free cash flow over the life of the deal. As indicated, when we announced our transaction with WarnerMedia, we did not repurchase any shares during the quarter, as we continue to invest in our next-generation initiatives and conserve cash ahead of the closing of the deal. And finally, we now expect FX to have roughly a positive $100 million year-over-year impact on revenue and a negative $20 million impact on AOIBDA in 2021. We continue to operate in a solid footing dynamically growing our direct-to-consumer business with contributions to our top-line growth becoming increasingly meaningful and optimizing the resilient core linear business creating strong conversion of AOIBDA-to-free cash flow. We remain focused on delivering solid operating performance, while we’ve built the framework to support long-term sustainable growth and shareholder value. And we are eager and excited once we gain all the requisite approvals to roll up our sleeves to capture the tremendous opportunities offered by our proposed merger with WarnerMedia. And of course, we look forward to speaking with you at the appropriate time on our thoughts and plans around integration, strategic direction, synergy, et cetera. With that, I'd like to turn it back to the operator to take the questions.

Kutgun Maral:

Good morning and thanks for taking the questions. And just on direct-to-consumer, can you help us better understand the international roll out trajectory? I know you called out Brazil, Canada, Philippines and a few European markets with Vodafone for the back half of this year. Some of these are particularly big broadband and mobile markets. I'd be curious which market launches or distribution partnerships you see as the biggest opportunities? And maybe more broadly, how are you thinking about the subscriber momentum into the back half of this year, especially I think there is some concern that we might see some churn pick up with some of these distribution partnerships that had fixed line promos. And then, just lastly, I know it's early, but any thoughts on the international roll outs looking for 2022? Thank you.

JB Perrette :

Yes. So, we have, as you noted, we have the markets we've announced that we'll be rolling out. I think we feel very good about them. When we announced when we get closer to the actual release date we'll will also be announcing in many of the markets as we’ve done to-date both in the U. S. as well as internationally, partners that will be launching with and so you should expect sort of fairly consistent to what our historical precedent has been from strong partnerships in a few of those markets that we roll out. And so, we feel good about that. I think as Gunnar touched on in his comments, we are - they are all sort of leaning towards more sort of September and into the fourth quarter where we had hoped obviously to be slightly more ahead of that into the third quarter, but due to obviously wanting to make sure we got the Olympic games off the ground successfully and getting this replatform and completed. Some of that will hit a little bit later in the second half of the year, than we had initially thought. And in that time period, I think we do see internationally some obviously – we are expecting significantly more growth coming out of those new market launches as we get towards the back half of the year. As it relates to 2022, I think it's a little bit early to talk about that. The only comment which David and Gunnar made amplify is, obviously, as we get later into 2022 when we get further visibility on the timing of the WarnerMedia deal. We obviously will look at making sure we stay smart in the context of when that timing and when that deal might close as to how we maximize the roll out schedule of those services into 2022. So that's I think as much as now. Gunnar or David, if you want to add anything else such as...

Gunnar Wiedenfels :

And Kutgun, maybe one thing that I'd like to add is, your question on churn. So that continues to track very nicely ahead of our plans. And most importantly, roll to pay is also very stable as I said close to 80% across our various products. And to your point about some of those distribution partnerships starting to come off of the initial period, that's another area where we've actually been positively surprised. It’s a little lower there as you would expect, but not as meaningfully lower as we had modeled. It's actually been a positive surprise.

Operator:

And your next question comes from Steven Cahall from Wells Fargo. Your line is open.

David Zaslav :

Thanks, Steven. Well, let me first speak to the merger timing. I was in DC last week. I met with across the board, spent the full day. There is broad support for this transaction. We haven't heard any pushback. We haven't seen any push - double pushback. This becomes a very strong company for consumers. A more compelling stream of business. And so, right now, it feels to us on every level, like we've seen green lights, we are not seeing any yellow lights or red light. Having said that, we're not in control of the timing. Disney was able to get their deal done in six months. Everything so far is extremely positive. But some of the timing with respect to the IRS and the DOJ. We can't - they're working very effectively with us. The AT&T team and John. John has a terrific team that's working with our team. But ultimately, it could be significantly sooner. It could be a little later. We are just not in charge of the timing. But we feel very good about it at this point. There is nothing that we see and I mean, we're still hoping that we could really get lucky that it'll will happen a lot sooner. And that's what we're all pushing for. On consolidation, look, I take a look at this business, Warner Brothers Discovery. And there is just - the toughest thing to do is to put together a great library or a great menu of content or IP. That is the most difficult thing to do. Yes, we need a strategy, but what the price is? Is it ad is it ad live. It’s exactly how do you go to market in each country. But the toughest thing to do is come up with a menu and have the strength of content to not only get people to come there, but get them to stay. And one of the things that's happened since our deal, as you look at the Amazon deal, or you look at the announcement of the Reese Witherspoondeal, almost $1 billion for that basket of content, almost $9 billion for the basket of content that that MGM has. Great company. Reese developed a great company. But we own significant amount of the MGM library. This new company when it comes together. Harry Potter, King Kong, Godzilla, Batman, Game of Thrones. You look at what Casey is doing right now with Hats, White Lotus, Sex and the City coming back, Friends, Friends Reunion, Space Jam having a big week – a big weak against the Marvel property. And so, which Toby put together. And Jason, they're sitting on top of just an extraordinary library of IP. Hanna-Barbera, all these things you cannot create. And so, we look at all of that and we say, we can't wait to close. We think we have the broadest, most compelling IP together with what Discovery has and as Gunnar said, we're seeing over three hours of engagement. Our churn is very low. We have great nourishment and the combination of Harry Potter, King Kong, Batman, together with all with all of our great nourishing content globally and all the local content we have around the world, as well as sports and news, we think makes us really compelling. Having said that, you look at – here is two transactions that have happened. People need more IP. I believe that what we have is, not only do we have, I think the strongest set of IP, but we have the broadest global - the most global content in language of anybody. So, I think we started off in a very, very strong position. I think we're fine if nothing happens. But I believe that over the next couple of years, there is going to be more and more people are going to look and they are going to raise their hands and there will be more consolidation. There will be a more IP libraries sold, because you need a lot of content to be successful. And I think people are going to take a look at what we have. What John Stankey put together, together with what we have and it's really going to be formidable. And Disney and Netflix have gotten across the lakes and we think that this will be the third global streaming service successful, sustainable, that's our mission. And a lot of the other IP that are subscale will probably be raising their hands or people, there will be a lot of consolidation. And some of that may be opportunities for us. But right now, I really like where we are.

Andrew Slabin :

Okay. Let’s go to the next question.

Doug Mitchelson :

Thanks so much. Couple questions if you don't mind. Gunnar, on SG&A, it was down quarter-over-quarter in the United States and you mentioned coming off of launch marketing or more efficient marketing, Is this 2Q level sort of a good SG&A level that we should expect to continue? JB, and David as well, JB, what have you seen from discovery+ so far in international markets? How does that inform your launch strategies for upcoming markets? And in particular, if you think about pricing for this service, you better off pricing at a premium for super fans or pricing low and trying to drive the services broadly as possible. Thank you.

David Zaslav :

Just, look, the - in terms of our all-in mission, our all-in mission, we're not going to get into how we are going to price in each market at this point, because it wouldn't be appropriate. We're not going to talk about exactly how we are going to package at this point, because we just can't do that right now. We have a compelling plan. We are looking at – we are going country-to-country. We are actually trying some different things, so that we can learn more. We're watching the great success that John and Ann is having as they accelerate. But, we're focused on 200 million global subscribers. This is not about niche. This is about global subscribers and for me, after we close this deal, it is going to be two absolute missions. Mission number one is drive direct-to-consumer to 200 million subscribers in every language in the world and with the product that's easy to navigate and use. And we think we can do that when we close, we're both growing. So we're going to start with a good base to get there. But that's the left side. The right side is, focus on having the best creative company in the world. And Warner Brothers has been the greatest creative company in the world. The place that the talent Warner come, the place where they feel nourished and support it and that's the history of Warner Brothers. And most of the great content that that I've seen that we've all seen, we don't even realize that in the end, we see that Warner Brothers shield and it stands for something. It stands for great storytelling. And we are, one of maybe the only company that has the ability to focus only on that one thing. We're not in the phone business, when this deal closes. We're not in the retail business. We are not cloud business We are not in the cable business. And so, that's the focus. And that singular focus I think will drive a great culture this is where people that care about content, that love content, that saw the magic when they were kids and they looked up at that screen. That's why we all got into this business. And that's the only business that we're in. And I think that, that together with the fact that Warner Brothers itself, we can open a movie everywhere in the world, as well or better, maybe best of class. And that's not going away. The motion picture business is not going away. It's why it's the top of the patina. It's why the greatest writers, producers, and creative talent came. And when you look up at that big screen, that's where stars are made and that's where magic happens. And so, 200 million subscribers, a great team putting these companies together to drive toward that and a great creative culture, with a - at the very top of motion picture business, that'll will be 100 years old in two years. And has a heritage of all the great story telling that we all grew up with. That's the company and that's what we're going to drive for.

Gunnar Wiedenfels:

And if you want me – and just one thing I can say on the current pricing to your question of discovery+. I will say that what we've seen so far is, the very broad, very scaling distribution, this is the international growth that’s not driven by one market. We've seen very even and very significant million plus markets so far across some of our biggest territories. So we feel that it's not necessarily a question of going high price, small or low price broader. The reality is, that we're able to hit this sweet spot right now with the pricing that we have in most of our markets which is on average for the entertainment here in this $4 to $6 price range and that that's scaling very nicely, Now, again, it’s hard to talk about the globe in one sloop, because ultimately markets where we have more premium sports, we will price higher. Markets where we don't and then have lower price sensitivities like Latam or Asia, we will price lower But generally, we feel like we can actually hit a very attractive price point, much higher than our wholesale pricing today and still be in a sweet spot that ultimately delivers scale at the same time.

Andrew Slabin :

Okay. Let’s go to the next question.

John Janedis :

Hi. Thank you. David, maybe, we could start, can you give us more color on Discovery Premier? How much more inventories available for you to sell into the market? Can you delve a little more again? And what does the CPM lift relative to the rest of the portfolio? And then, maybe shifting to discovery+, anymore early trends you could talk about from a viewing perspective? Is the proportion of time spent there on specific networks or programs consistent you’re your linear networks and for the content that's premiering on discovery+, are you seeing a lift and subscriptions or impact on the new ratings thanks?

JB Perrette :

And generally, I'd say, to your question about engagement on discovery+ and content, it does - it does, John, largely, obviously follow a lot of our biggest networks. But the genre is certainly in the crime, paranormal, a home, the discovery content, a lot of this sort of traditional our core genres in the linear space also are those that are driving our discovery+ activity in the U. S. That is obviously, reality, in the TLC, sort of genre, also a big driver for us. As you spread out and go internationally, it becomes a little bit more diverse in the sense that obviously, we have bigger broadcast content in markets like Poland, the Nordics, Italy. And so we have bigger entertainment formats, also that are working extremely well and then sports which we talked about both in terms of the Olympics and outside of the Olympics. So it becomes a slightly more diversified story outside the U. S. But in the U. S., it is driven by a lot of the core, John, you think about us for TV.

Andrew Slabin :

Okay. Let’s go to the next question.

Jessica Reif Ehrlich :

Thank you. A couple of questions. There have been press reports regarding your interest in Channel 4 in the UK. And I mean, it's great that you are still looking at transactions like or you're about close one of the biggest. But can you talk about M&A priorities or opportunities outside the U. S.? Can you give us an update on what's going on at Poland from a regulatory perspective? And then, finally, in advertising, how much crossover is there on the various platforms for your advertisers? Or are you tracking different advertisers to different platforms?

JB Perrette :

And Jessica, the only thing I'd add to that one is also, we think it as a - we're proud of the fact that, unfortunately, every time that anything is potentially up for sale, our name gets mentioned, because we have obviously had a successful track record of acquiring, integrating and then successfully managing all sorts of businesses. The reality is, oftentimes, and the David said, particularly, these days, our focus is in a different direction right now with the closing of the Warner deal. That's our primary focus. So, in terms of the ad sales, clients and I’ll come to Poland at the end. On ad sales, we do see a vast majority of our clients overlapping between linear and digital. So, it's a very strong correlation and a number of clients were doing both. On Poland, look, as we’ve said, I think publicly in the past, we remain very committed to the business. It's a great business. It continues to be a growth business and a very healthy business for us. The environment is obviously challenged. We're actively talking to all the different constituents and stakeholders to make our case. And we think it'd be very, very economically irrational for the government to try and pass any laws that ultimately would change our position and make the environment way less attractive for foreign investment, not just media any foreign investment. And so, at the end of the day, we're continuing to work that situation aggressively on all sides. The U. S. government the EU have all been very supportive and fully behind us. And we'll keep you posted as that continues go on.

Operator:

And your next question comes from Robert Fishman with MoffettNathanson. Your line is open.

David Zaslav :

So, let me just start by - with the core cutting question. Outside the U.S. in the aggregate, with the exception of last quarter, the period during COVID where we really grew, we're doing as well or better as we've ever done in history. This past quarter, we were strong - much stronger than we were in overall share than we were in 2019 or any before through all those prior years. And unlike the U.S. where pricing is so high, pricing for entry cable is much lower around the world. And so, there is some decline and there is some decline in viewership. But it's much more moderated than what it is in the U.S. JB can speak a little bit more to that and then I will jump in on the sports piece.

David Zaslav :

On the sports, we're learning. I mean we've been at it for now over four years. So we needed to find a better product then we were going direct-to-consumer in Europe with individual sports. And the good news is we are trying different things. And we're trying to figure out ultimately, the consumer is going to decide how they want it. And we're finding that we're having more success when we put the sports together with the entertainment together with the non-fiction. But it's early days. It's still only the third in it. So in a lot of these markets now, where we have football, where we have cycling, because we're putting it all on D+, we're looking and we're trying to get a sense of what's the acceleration of subs. What happens to the churn? Right now, it looks quite favorable. We are also anxious to see which will - where we're not getting an inside look at all in Warner, but they launched in Latin America and they launched with a lot of very compelling sports like football in Latin America. What is their experience? The Olympics has been a really good experience for us. We're doing very well with it. Share is up 30% with Pyongyang. We are finding that the engagement is much higher, as I've said. And so, we don't know yet what the churn is going to be. I think it's going to be helped by the fact that we have Beijing coming. But ultimately when these companies come together, it's all about the IP menu. We have news. What roles will news play. We have sports. It’s not the leader, we are one of the leaders in the world in terms of the sports. Jeff Zucker and John Stankey, and Jason got, we're able to lock up sports rights in the U. S. with some of the best leagues outside of football, which is compelling. So, when you look at all that IT and figure out, what do we do with it? How do we offer it? Is it all pay? Is some of it free? Is it all together in one package? Is it in two packages? But the sports, I think is not that different from Harry Potter or a King Kong or DC comics or a lot of the HBO IP, but with the exception of the fact that we don't own most of the sports. So, what we've done is we try to get long rights for those sports and be very careful about what we pay for it. But we will - there is a difference in that when you are building these the franchises that we have, whether it's Ship and Joe, whether it’s the Ophrah Winfrey pro product or whether it's Warner Building in DC, you own that forever. And sports you have to eventually come back and pay for. And so, there will be a view over the next several years of how that - how important sports is. How - and what the return is on it. But we're very happy with the fact that we have fantastic sports globally that we'll be able to use when this company comes together in the package and we're doing very well with sports in Europe right now. JB anything to add?

Gunnar Wiedenfels :

Robert, I want to just repeat one thing that David said in passing, is to make sure that everybody has heard this. Our second quarter this year was the second strongest in our history internationally when it comes to actual volumes delivery in terms of eyeballs of viewership, second only to last year’s second quarter, which was obviously impacted by the massive COVID spike. So it is a fundamentally different story internationally versus domestically. Yes.

Andrew Slabin :

Let’s go to the next question, please. Thank you.

Ben Swinburne :

Thank you. Good morning, everybody. I want to ask about the upfront and then also about the streaming subs here in the third quarter. David, obviously, there is tremendous demand for linear television as we head into the fall season. Can you talk a little bit about whether Discovery was able to navigate some of the measurement challenges that Nielsen has created in the past around delivery and make us, were you able to do more non-Nielsen deals? Or do you think that's even cost the company any money in the past and maybe it's something we shouldn't get that focused on with that? I know you've spent a lot of time on it and it seems like the demand side of advertising is strong. I am curious if you could just comment whether you guys feel like that's a headwind or you've sort of navigated around it? And then on streaming, I don't know this is for Gunnar or for David. The $18 million number, I guess, captures probably the Olympic lift you've got. And it seems like you're talking about most of your international launches coming in Q4. I am just wondering if there is any other headwinds or tailwinds we should be thinking about in the third quarter or if we should think that there probably won't be a lot of growth here in August and September. Just anything you want to add as we think about Q3? Thank you.

Gunnar Wiedenfels :

And on the on the streaming subs then, so, look, one thing that we all need to keep in mind that we've said many times it's very early still, right? We don't have a full year yet of a normal cadence and that's just important to keep in mind. But what's very clear is that obviously there is a seasonality throughout the year and the summer months as you would expect across video in general are not the strongest. And if you look at the numbers that we have reported, we've been able to add 1 million subs on average across these months which again, I think I am very pleased with. And to your point about the Olympics, it's important to keep in mind that there is a certain amount of free trial in those. So, our 18 million subs number does not include all of the subs that we are gaining or will gain through the Olympics.

Andrew Slabin :

Let’s take our last question, please.

Alexia Quadrani :

Hi. Thank you. I just – just two quick sort of follow-up questions, one on advertising and one on your streaming service. On the advertising side, it's been incredibly strong, which you've highlighted through the second quarter. We’ve seen it industry-wide clearly in your results. I am curious if you are seeing any cracks in the advertising strength in so far in Q3 just given the delta variant and sort of the recent return of spikes in the pandemic? And then, my follow-up - the question really is just on the Ad Light product that you have that seems so much more profitable in terms of bringing more revenue. Is that where you're seeing the higher percentage of growth in terms of the new sub apps?

JB Perrette :

We are not - we're not. But only to say that, at the end of the day, we're seeing actually still continued healthy growth on both sides on both products. So, it's not sort of one dominant and one we're seeing continued your growth of both.

David Zaslav :

The only thing I may add on the advertising side, to say the obvious, the comps are obviously going to get a little tougher as we go into the second half, right? So we continue to see a very, very robust market robust demand. No signs of the COVID break, but obviously, we're now comparing to a slightly higher baseline in 2020. And we also across the market, obviously had a little bit of a tailwind from political advertising as I pointed out earlier. So those are the two factors to keep in mind.

Operator:

Thank you. And that concludes today's conference. Thank you for joining Discovery Incorporated Second Quarter 2021Earnings Conference Call. You may now disconnect.

Andrew Slabin:

Everyone, thank you for joining us for Discovery's Q1 Earnings Call. Joining me today are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perret, President and CEO of Discovery Networks International. You should have received a copy of our earnings release, but if not, prefer 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'll 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, 2020, 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.

Gunnar Wiedenfels:

Thank you, David, and good morning, everyone. My aim this morning is to provide a slightly more detailed peak into the operating model as well as our near-term outlook than what we would more normally do, in large part given the recent volatility. To the extent that this has created additional questions and/or concerns, my goal would be to help alleviate it as possible this morning. 2021 is off to a great start. As David just mentioned and which I'll provide a little more context around KPIs, particularly in the U.S., where we launched at the beginning of this year, across engagement, monetization and churn and implied customer lifetime value continue to reinforce our belief that prioritizing investment in discovery+ will generate superior returns on capital. As noted, engagement is truly stellar with viewing subs watching roughly three hours of content per day, well ahead of linear and nationally, an underlying contributor to both retention and monetization. And retention is indeed looking very encouraging with churn coming in quite a bit lower than we had initially anticipated. While it is still too early to evaluate a stable monthly churn rate, the retention curve of our first subscriber cohorts are looking very encouraged. Based on these early observations, we expect trend towards low single digits over the course of the next 12 months. Turning to monetization, which is also well ahead of plan. Then the ARPU for discovery+ in the U.S. is already in line with our $7 linear channel going by the strong monetization of the AdLite product where ARPU has already exceeded $10 in the first quarter. Clearly, strong engagement in watch time despite offering only a 4 million [indiscernible] amending themselves to healthy advertiser demand and return exceptional CPEs. Still early days, though we see a notable path for further monetization as we continue to scale and drive additional engagement, attract additional advertisers and brands and roll out new advertising products. Global ARPU is over $5 away with international ARPU as expected below that of the U.S. This is in part due to the market price points and in part because we are launching the greater share of our subscribers coming through promotional partnerships, which drive faster adoption and marketing efficiency, but also come at an initially lower ARPU. That being said, we are in virtually all cases to see ARPUs that are multiples that both the existing wholesale linear pay-TV at which we currently monetize it. This, of course, is a core tenet of our international discovery+ strategy and a great objective testament to the quality and value of our content in the marketplace not limited by the boundaries of traditional pay-TV ecosystem. Taking these metrics together, we are modeling a much more substantive estimate of customer lifetime value while subscriber acquisition cost is currently running at a very healthy cushion to that. Based on these trends, we are increasingly more confident with our outer year projections and our target margin profile of 20% at scale. While it's still too early to formally update this number, we believe there is meaningful upside to the target based on all these initial indicators trending above our business case assumptions. During the first quarter, next-generation revenues increased 52% year-over-year. And we look to build upon this momentum in Q2 with next-generation revenues set to more than double yearly, driven by both volume of subs and modernization. We did invest heavily in marketing spend in the first quarter to support the U.S. launch of discovery+ and rebranding and play in key international markets, a sizable portion of which was dedicated to upper funnel brand marketing to build awareness as well as bottom-up funnel performance marketing. This accounted for the vast majority of the year-over-year increase in OpEx alongside content and investment. In the aggregate, next-gen OIBDA losses were roughly $400 million in the first quarter. We expect a modest sequential improvement in next-gen losses in Q2 as continued substantial marketing efforts to roll out additional territory and requisite content and tech spend will begin to be offset by more material revenue contributions. Also, we expect to better optimize a refined marketing spend as we gain additional insights. Quarter-to-quarter losses and quite possibly what ultimately falls into 2021 versus 2022 is still subject to a number of moving pieces. And we will obviously provide as much transparency as possible ahead of such movements, particularly as impacted by rollout plans around the Olympic games, planned technology spend and platform integrations and determined by specific partners. That said, we continue to remain confident that 2021 will represent the peak year for loss from our investment initiatives. Of course, we are as mindful as ever about the magnitude of these expenses and their impact on our financials, yet we are reassured by the compelling return metrics against this Now turning to the segments. In the U.S., advertising finished down 4% during the first quarter, in large part due to universe estimates and sub level declines, which ultimately translated into lower impressions across the industry and our networks. That said, we continue to outperform our pay-TV network peers on share during the quarter. Moreover, pricing remained robust, scatter CPMs developing strongly during Q1 and expected to be up around 30% year-over-year with roughly 50% premium versus upfront in Q2. In fact, total dollar volume for Q2 scatter will be up considerably versus last year as we see categories such as auto and travel coming back as well as from the input of B2C companies, including many new TV advertisers. discovery+ has started to advertising revenue in Q1 as subscribers grew throughout the quarter, and we expect an increasing tailwind from this component through Q2. As such, we expect U.S. advertising revenue to grow in the low double-digit range, helped in part by COVID comps, strong pricing and advertiser demand across the businesses. U.S. distribution revenues were up 12% during the quarter, at the high end of our expectations. Mid-single-digit linear distribution revenue growth continued to be supported by contractual filling fee increases, partially offset by pay-TV subscriber decline. Subscribers to our fully distributed linear networks declined by 2%, while our total pay-TV subscribers declined by 4%, likely top of peer performance, helped by additional network carriage resin affiliate renewals and continuing share gains at virtual MVPD where we remain very well canvassed across all key platforms. In addition to our healthy traditional affiliates business, the launch of discovery+ and the subsequent ramp-up of subscribers accounted for much of the sequential acceleration in distribution revenue growth. During Q2, we expect reported distribution revenue growth will accelerate further even against a much tougher comparison given the significant onetime benefit recognized last year, implying a significant acceleration on an underlying basis, supported by similar drivers as in Q1. Turning to international networks, which I will discuss, as always, on a constant currency basis. Advertising were 8% during the first quarter as all international regions, EMEA, LATAM and APAC returned to growth, the first since the start of the COVID-19 pandemic. Latin America developed positively driven by Brazil and Mexico. And despite intermittent lockdown in certain EMEA markets, we saw mid-single-digit growth across the region due to continuing share gains in key markets like the U.K., Spain and France. Finally, APAC was also up significantly during the quarter. In Q2, as we comped the substantial declines faced by the advertiser industry last year during the initial stages of the COVID pandemic, we expect international advertising revenue growth to exceed 50%. International distribution revenue was down 2% in Q1 due to lower linear pricing in certain European markets, partially offset by our growing discovery+ subscriber base. We expect international distribution revenue to accelerate to mid-single-digit growth during the second quarter, driven by the same factors. As we called out in prior quarters, as we repositioned a number of key international distribution partnerships towards a hybrid-type structure, we've opted to trade nearer-term upside on the linear portfolio for greater in terms of support for our DC efforts. Segment performance has already reflected some of the impact of this over the last two quarters. Turning to the expense side. Total operating expenses for the consolidated company were up 21% during the quarter. Cost of revenues were up 2%, largely due to the continued rent and content investment to support our next-generation initiatives and the timing of sports content in Europe, partially offset by more efficient content spending. SG&A increased 48% to reflect marketing and branding as well as personnel and technology spend to support our next-generation initiatives. As we guided previously, we continue to target low- to mid-single-digit percentage reduction in our core linear business offerings. Turning to free cash flow. We produced Q1 free cash flow of $179 million with an AOIBDA to free cash flow conversion rate similar to the prior year quarter. We remain confident and reassured in our ability to financially support all of our strategic endeavors as we continue to convert AOIBDA at a highly efficient rate despite the initially significant ramp in our investments. We did not buy back any shares during the quarter. As I noted earlier, we continue to review investments in discovery+ as the best fundamental use of our free cash flow in order to drive sustainable growth in shareholder value. Further, for the next few quarters, we also want to maintain an appropriate amount of financial cushion in the cadence of our global discovery+ rollout remains fluid, both in terms of where and when we launch and the level of investment required to penetrate specific markets. And while we are investing against a rigorous financial framework, bear in mind, that we're gearing up for two sets of Olympic games this summer and in Q1 next year, both of which will be 10 pole events for the marketing of our D2C and linear brand. We will, of course, continue to update you on our views on capital allocation as we [indiscernible] quarter at approximately 3.5x net leverage, and needless to say, remain fully committed to our investment-grade rating. Turning to a couple of housekeeping items. Number one, as you may have noticed, we are no longer disclosing adjusted EPS as AOIBDA to free cash flow continue to be the key financial metrics in evaluating our operating performance. I will, however, provide you with the PPA impact each quarter as well as point out key note items to help calculate an adjusted EPS number to the extent helpful. For the first quarter, PPA was $0.32 per share. Number 2, we expect FX to have roughly a positive $40 million year-over-year impact on revenues and around a negative $25 million year-over-year impact in AOIBDA in 2021, reflecting the strengthening of the dollar and sterling since the start of the year. We are operating on strong footing, evidenced by a rapidly growing direct-to-consumer business and the resilient core linear business. And our ability to convert AOIBDA to free cash flow where I continue to see at least 50% this year has never been more valuable given reinvestment demands. We have a self-funded business aimed at supporting an immense global direct-to-consumer opportunities. We couldn't be more excited as a management team to focus on continuing to deliver solid operating performance while we build the framework to support long-term sustainable growth and shareholder value. I'd like to turn it over to the operator to start taking questions.

Robert Fishman:

Full year core, U.S. affiliate fee growth after excluding next-gen revenues for the full year? And then more broadly, have you seen any pushback from launching discovery+ in domestic affiliate fee negotiations? And maybe if you can talk to whether the launch of discovery+ on Xfinity should be viewed as incremental or cannibalistic to your overall partnership with Comcast? Thank you.

JB Perrette:

The only thing I would add to that is outside the U.S., we've been doing real partnership arrangements, whether it'd be Vodafone or Sky, where it's seen as a real positive. And the fact that Comcast is a great operator, he's launched us on Flex. We're now going to be launching on X1. So we really -- effectively, we have two sides of a terrific partnership. They're getting value in -- and we're talking to a number of other distributors that we'll be following on. But it's not cannibalistic at all with Comcast. They're able to create value for us and for them by -- and I think they have some real entitlement. They're a broadband leader. And these channel stores have really developed. And Comcast is looking. And between Flex and X1, it could be a real generator of value for both of us. And as Gunnar said, the share of our traditional channels are going up. They're selling those channels. The cost of those channels are very low, and we're probably the best actor in that space and that we're providing the core value of the bundle. And we have renewed some deals since we launched discovery+, and we've done very well.

Operator:

Our next question comes from Doug Mitchelson with Crédit Suisse. Your line is open.

David Zaslav:

Thanks, Doug. On the upfront, look, I don't know that I've seen 50% increases in CPMs of a prior year upfront before. The CPMs are very high. But what we really have an advantage of is that the broadcasters have been getting $60 plus, and we've been getting less than half that. And now all of a sudden, instead of companies, we're booking -- we're really making progress in booking significant dollars in the 40s, high 40s, even $50. And part of that has to do with the fact that our share is going up. We have some hit shows whether it'd be mail on Discovery or whether it be shows like, like 90 Day Fiance, which is number one show on television. And we've started to get paid a lot more money for that. And so I think you will see our CPMs, I think, meaningfully better because we have a lot of headroom still to drive our CPM versus competitors that have been at a very high level. So I think we hit this upfront at a very good moment. In addition, we have now some scale inventory on discovery+, which is selling very well. And in the -- in that environment, then on Go, we don't have the disadvantage of it's -- a viewer is a viewer. So we don't have that inherent disadvantage versus the broadcasters. So we're getting paid on every sub. And we also have a very good demographic, which is generating dramatically higher CPMs than we're seeing in traditional. So overall, I think the advertising market, very, very strong, upfront coming up, feeling good about it. In terms of balancing, the idea that we have viewing subs on discovery+ spending over three hours. And that we have the highest ratings and that our churn is extremely low is telling us a lot about the quality of this product. But what's really interesting is that the top shows, our top original shows and top shows from our channels are only generating about 10% of the viewership. We have a very long tail library about the size of Netflix, and people are spending a lot of time with it. And a lot of times -- so we don't have like the one -- we don't have the one-hit show or the one-hit movie. But I think as a result of that, we're seeing much lower churn than our peers. And usage, that is a lot more. And that's generating real economics for us on the advertising side, which has surprised us, the kind of economics that we're getting. We will continue to experiment with how we move IP around. We have a lot of originals now on discovery+, and we have more coming. And we'll be doing that globally in addition to the local content that we have outside the U.S. JB, maybe you could speak to the balance as we look outside the U.S. for discovery+.

David Zaslav:

And then, Doug, maybe if I can just add to that, it's an upside. But right now, I mean, the trends are so overwhelmingly positive. I mean we have so much opportunity without to fiddle with the consumer experience here, right? As we said, we're already tracking north of $10 ARPU for that headline product. And as you would imagine, there's been a positive trend over the course of the quarter as we have sort of fired up the subscriber base and attracted more advertisers into the product. So there's an underlying positive dynamic. But if you just take a step back here, why are we saw excited about this? Number one, we've ceased to just sell a commercial demo. It's a big difference between the linear TV and our digital platform here. We're selling every single eyeball on discovery+ and TV Everywhere for that matter. Number two is we've got a really level playing field here. That big gap between and cable CPMs that we've been discussing for seen for decades here just doesn't exist. It's premium online video, and we're getting full value for our product. Not only that, we have a highly engaged audience. You heard some of the stats that we mentioned that are probably top of the industry, very family-friendly content environment. Couple that with the fact that premium online video inventory is scarce in the first place because a lot of the viewership is happening on ad-free platforms, that drives super high demand and a hot market environment right now. The other thing that I want to make -- the other point I want to make here in terms of upside is we're still in the early innings from the perspective of our product offerings towards advertisers, right? We have just launched our Binge advertising product pause ads. We're working on more. And it's in a way, it's part of the prioritization exercise here to get all those features online, but there are a couple of great other ideas. So I do think that we will, without even playing with a number of minutes here, we will have a pretty positive run rate here for ARPU over the next couple of months.

Kutgun Maral:

Two, if I could, first, on the international pay-TV ecosystem. One of your peers recently announced plans to shutter a number of its networks across parts of Asia to focus even more on, on your end, can you refresh us on what linear TV -- pay-TV subscriber trends you're seeing across your larger international markets? And ultimately, your comfort level in the sustainability of those trends compared to perhaps maybe more drastically pivoting towards streaming? And then I have a follow-up.