Q4 2020 Discovery Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Discovery, Inc. Fourth quarter and full year 2020 earnings conference call. At this time all participants lines are in.
Please note after the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press Star and then one of your telephone.
Please be advised that today's conference may be recorded if you require any further assistance. Please press star and then zero.
I would now like to hand, the conference over to your Speaker today, Mr. Andrew <unk>.
Executive Vice President Global Investor strategy, Sir you may begin.
Good morning, everyone. Thank you for joining us for discovery Q4 earnings call. Joining me today are David Zaslav, President and Chief Executive Officer, Gunnar of Eaton cells Chief financial.
Officer, and JB, Perrette, President and CEO of discovery networks International.
Should have received our earnings release, but if not feel free to access it on our website at www Dot corporate Dr Discovery Dot com.
On today's call, we will begin with some opening comments from David and Junior and then we will open the call to take questions before.
Start I would 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 1095. These statements are made based on management's current knowledge and assumptions about future events.
We saw 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, and our subsequent filings made.
Made with the U S Securities and Exchange Commission and with that I'd like to turn the call over to David.
Good morning, and I hope everyone is having a great start to 2021.
And we thank you all for joining us here today.
This is a dynamic time for discovery.
The past year.
And they have been one of change challenge and opportunity.
During which we have shown incredible resilience creativity and focus as one global team.
From navigating the pandemic.
To generating meaningful momentum towards our strategic pivot.
Discovery has respond.
<unk> is drive and determination.
This is also a unique time for us.
Because as we are working hard to solidify our core linear business.
And which we continue to meaningfully outperform.
We are repositioning the company against the massive new opportunity in streaming.
And with what we already see very positive signals and signs.
Taken together with the durability of our core business.
Will nicely positioned the company for sustainable long term growth.
Sustainable long term growth.
That is our mission.
And we are laser focused on deliver.
We finished 2020 with strong operating momentum and.
And great command and control across our global businesses.
Delivering top line improvements across virtually every key operating metric since the pandemic hit.
While main.
Maintaining strong discipline over our expenses.
Without sacrificing quality.
Or missing a beat and our creative execution.
We were even able to return nearly $1 billion of capital to shareholders and equity buybacks.
We learned a lot as we.
It's through 2020.
And our tenacity and agility, which is truly at the heart of discovery took.
Took center stage.
The impact of our content.
Either as measured in terms of global share growth.
Or simply in the way people sought us out for comfort and nourishing.
Demand during a difficult time became more relevant and more of the moment.
Like never before.
We encouraged our talent to bring us into their kitchens gardens living rooms, with iphones and <unk>.
And it was a game changer.
When most of our peers.
Older repeats.
We became closer to real and more authentic on air.
And that provided a great boost of adrenalin across the company.
And our talent partners.
And refined our IP all around the globe.
Your show even more excited about 2021 and the meaningful progress we are making in our strategic pivot.
While at the same time working hard to support our core linear networks business and reinforcing its importance as a critical part of our total consumer offerings.
Discovery plus is off to a fantastic start.
And we couldnt be more encouraged by all of the early metrics.
After seven weeks since launching here in the U S. We have over 11 million paying direct to consumer subscribers across our entire portfolio.
And EMEA.
And we will hit 12 million.
By the end of this month of February.
An increase of 7 million net ads as.
As compared to 5 million subs, we reported in December.
The vast majority of this increase.
<unk> per beautiful to discovery plus.
And substantially more than half of the 7 million ads are paying discovery plus subscribers in the United States.
And we're really just getting started internationally.
As this comes without.
Is it from any new markets other than our previous D play markets that we rebranded to discovery plus for.
For example, we relaunched Italy, just a few weeks ago.
In the U K in Q4 2020.
Both of which are off to a strong start.
Given our.
Adding shipping control all of our content.
Our increasingly relevant content.
Expect us to light up markets globally over the next 18 months or so.
And in many key markets, we intend to partner with key distributors, such as we did with Vodafone and Scott.
Our own these discussions are active and going very well.
And our existing momentum is helping facilitate these conversations.
As distributors remain keen to provide incremental value to their subscribers as a means of leveraging their pipe.
And de Commoditizing their offering.
In both regards we are a fantastic partner.
We bring strong global and local IP at.
It really superior value.
We are by far.
The best value to consumers and distributors and a global <unk> service in the marketplace.
Helped by our financial model and the fact that we own all of our global IP.
The rollout of the discovery plus platform has been nearly flawless without any technological disruptions or outages.
The discovery plus product launched with all.
Major platforms and devices Roku fire, Android, Apple, Samsung and Theres more to come.
And we came to market with an ambitious slate of over a thousand original hours over the coming year.
Day tuned for further delivery partnerships such.
<unk> partnerships with cable operators and other connected TV platforms, all of which move US further along is our goal to be among the most widely available platforms to consumers everywhere on the globe with.
With easy access to consumers in every language.
Such as importantly.
Consumers love the discovery plus product.
And it shows with all key operating metrics pointing in the right direction.
We're seeing very high consumer engagement.
And high video starts.
An incredible 93% of our entire.
Our 55000 episodes of library has been watched.
Indicating a very healthy long tail of content that is immense value to consumers now that we've made it available.
We're also seeing high retention over the first 60 days.
As well as strong monetization.
<unk> is already translating into incremental value Gunnar will provide some additional details on financial context, but.
In short stronger operating performance across the board is contributing to our better than expected financial profile.
And accelerating next Gen revenue growth in Q1.
Then thereafter.
Very healthy role to pay.
And initial signs of lower churn than we initially modeled will drive accelerating sequential domestic affiliate fee growth.
Even over Q4 is impressive 5% growth rate as we begin to layer discovery.
One plus on top of our core base, resulting in at least high single if not double digit affiliate growth in the following quarter.
We now have over 100 advertisers and brands on the platform in the U S and we expect to double that by the end of.
Q2.
Our team is working hard at implementing our feature rich product roadmap. We are now offering contextual keyword targeting and interactive ads will rollout by the end of Q1 with pause and binge ads scheduled for Q2.
And as the subscriber base.
Further scales.
The benefits of combining the intelligence and data mining capabilities on RF.
Together with Advertiser first party data will represent a significant opportunity for us.
And our advertising partners.
We are already an industry leader when it comes to time span.
<unk> with our linear portfolio.
Yes watch time on discovery plus in the U S is nearly twice that.
This naturally has been extremely well received by our advertising and brand partners.
Which coupled with initial signs that discovery plus extends effective reach to non pay.
Television viewer's gives us even more conviction and confidence in the long term <unk> trajectory in fact, our AD light <unk> in the U S is already above linear.
We are just getting started.
As we scale and usage continues we are confident our pool will grow.
Grow meaningfully internationally, JV and our product and engineering teams are hard at work transitioning our former deep play on Eurosport player platforms to our new discovery plus global product in time for the Tokyo Olympics, and the Beijing games not long thereafter.
Discovery plus.
Plus we'll be the screaming home of the games in Europe with access to every minute every metal and every hero live and on demand.
Having this product integration completed we will enable us to then execute more of our ambitious international expansion plan in the back half of the year.
As I previously noted.
Taken together discovery plus has successfully launched as a truly differentiated product.
With a fantastic consumer experience.
Best in class product reviews, and terrific word of mouth.
Which is ultimately the most effective form of.
Marketing.
We are being educated every day on what's working and what's not on our responding rapidly to iterate and experiment.
We are utilizing all of our levers to effectively and efficiently acquire and retain subscribers, including a growing list of global partnerships with many.
World leading distributors.
An exciting pipeline of originals that we believe will surprise and delight consumers.
And a brand campaign that is unrivaled in our history.
The team is doing a lot right and we are seeing the payoff in subscriber additions and engagement.
Of the which we believe there is no better use of our capital and resources than to continue to support these efforts as a means to drive shareholder value.
With the very healthy metrics, we've seen thus far.
Scaling our discovery plus subscriber base as quickly as possible.
Is the best.
For use of our free cash flow as we I sustainable long term financial growth for the overall discovery company.
Our first and foremost priority has always been and will always be.
To reinvest in our business to drive organic growth.
Our powerful launch serves as a strong.
Best your confirmation of what we have been hard at work building over the last many years.
And that which the acquisition of Scripps help to accelerate.
We have spent years amassing and cultivating the most popular real life entertainment content brands and personalities.
All with a focus on nurturing.
Strong our lighting, our fans across multiple video ecosystems, PE free and streaming.
It's having a real impact and.
And an impact we expect will continue to growth.
Investing in high quality premium program across the entirety of our platforms as always.
He has been our north star.
In fact at a time when many of our peers are taking their foot off the gas we expect.
To increase our spend on fresh content to support our linear networks this year.
This further reinforces our strong value proposition to our distribution partners.
Indeed, we believe.
<unk> and pay TV bundle is integral and relevant and offers an incredible value proposition to an important and large segment of consumers.
Discovery is a true global IP company in every sense of the word.
One of the very few true global IP companies.
The bank growing our bolt of Great stories and series has laid the groundwork for the critical next steps we are taking.
Evolving from a pay TV and free to Air company.
Into our scaling global streaming player.
Discovery's mission.
As to play hard in traditional free to air and cable with fantastic margins and free cash flow.
And play harder and direct to consumer.
While we are uniquely positioned.
To achieve long term sustainable growth.
With that let me now turn it over to go.
<unk>. Thank you David and good morning, everyone. Echoing Davids comments 2020 was indeed, a year that presented its fair share of challenges likewise, it stress tested our company in unprecedented ways.
Looking back I'm extraordinarily proud of both how our team reacted such disruption.
Well on how we proactively leaned forward into our.
Our strategic pivot I.
I do believe we accomplished a tremendous amount in 2020 operationally financially managerial and strategically and to set us up for a great start to 2021 and beyond which I will discuss in more detail shortly.
But first to briefly recap Q4, a very solid set of results across the board.
Starting with U S networks advertising revenues were consistent with the prior year supported by on AD market that continued to show signs of recovery as well as a general tightening of the marketplace due to political spend.
Following a generally advantageous upfront market, we saw extremely healthy scatter CPM up in the high 20% range versus upfront.
From an.
And up high single digits year over year.
On that trend has continued into the first quarter with scatter CPM up around 40% versus upfront and up mid teens year over year.
On balance demand has returned in most categories to year ago levels.
Number of verticals, such as travel movie studios and restaurants.
Restaurant chain still remain challenged U S distribution revenues increased a very solid 5% year over year during the fourth quarter as pricing more than offset subscriber declines supporting a nice acceleration from Q3, we benefited from a combination of a slower pace of subscriber declines the impact from recent renewals and our continued.
Strength across virtual Mvpds subscriber.
Subscribers to our core fully distributed networks declined by 3%, while our total portfolio of subscribers declined by 5%.
Now turning to the international networks for the fourth quarter, which I will discuss on a constant currency basis.
Advertising revenues decreased 1% year over year.
<unk> led primarily by continuing sequential improvements across many of our key markets and some like the UK, Germany, Poland and certain APAC countries finished the fourth quarter with positive growth.
While other markets such as across Latin America are still exhibiting COVID-19 related weakness.
Distribution revenues.
Decreased 4% year over year, we continued to see modest subscriber churn from more economically challenged countries in Latin America. Furthermore, COVID-19 related disruption and the sports schedule throughout 2020 continued to impact our eurosport performance from the fourth quarter as well as continued headwinds and overall pricing primarily in EMEA.
Total operating expenses were up 5% during the quarter cost of revenues were up 6% largely due to the condensing of sports schedule into the back half of the year and continued ramp and content investments to support our next generation initiatives.
SG&A increased 3% as we invested in marketing and branding promotion ahead of the launch of.
Discovery, plus as well as personnel and technology spending to support our initiatives.
And as we guided we finished 2020 with total operating expenses flat year over year ex FX as we reallocated spend and we continue to target a low to mid single digit percentage reduction in our core linear businesses as we support our nextgen.
Nextgen endeavors.
Turning to free cash flow, we finished 2020 with over $2 $3 billion on free cash flow of 56% EBITDA to free cash flow conversion rate a great finish considering the volatility on headwinds we faced this past year and still due to an extent from disruptions related to COVID-19, while at the same.
Time, having absorbed a meaningful step up in DTC investments.
And as we guided to at our December Investor Day, we continue to expect to convert at least 50% of our EBITDA to free cash flow. This year now I will turn into discovery, plus which is off to a very impressive start and though it's early in our launch on global rollout. We are very pleased with.
Early metrics.
First we have now surpassed 11 million total global paying direct to consumer subscribers after less than 60 day since the launch in the U S. The majority of which are attributed to discovery plus and more than half of the subscriber additions were in the U S and as David mentioned, we will hit 12 million global paying.
Subscribers by the end of the month.
Importantly, both roll to pay and term had been better than plan and while early these represent critical variables in our modeling.
Third engagement as measured by average watch time per active viewer has been robust and already significantly ahead of linear fourth this.
All of <unk>, along with advertisers and brands eager to embrace our subscriber base is driving higher CPM. It is worth pointing out the value of our advertisers see in the portion of our subscriber base that are not currently pay TV subscribers delivering much needed incremental reach to the video advertising ecosystem. This as well as contributed.
This is very healthy at monetization that is already well ahead of plan.
Number five this has led to our pool for our AD line product that has already surpassed average linear ARPA.
And we see further upside as we drive scale on subscribers a key tenant we laid out for you in early December.
Number.
Too early signs of churn are within our expectations, if not better which taken together with the monetization framework I provided are contributing to our higher than planned customer lifetime value than our initial modeling.
Number seven finally subscriber acquisition costs have so far come in very favorably, especially compared with the evolving customer lifetime value.
Six consequently, taking these early data points together, we see both a very strong start to nextgen revenue growth in 'twenty and 'twenty, one with Q1 poised to grow around 50% with meaningful acceleration in the quarters thereafter.
And a much more attractive investment opportunity around subscriber growth.
Given discovery plus net adds the majority of which are.
We should also enjoy a more direct tailwind through our domestic distribution growth profile. This quarter as such we expect Q1 domestic distribution revenue to increase at least high single digits, if not low double digits year over year, a meaningful acceleration from the last quarters.
I must say I like the sound of that candidly, it's been a while.
In the U S had a growth profile like that for domestic distribution.
Yeah.
While the advertisers embraced for discovery plus has been great and will help to support our overall advertising profile as we scale, we expect a modest sequential headwind to Q1 U S advertising revenues in part related to macro factors as well as the launch of.
Since free plus where we are leaning in with more of our inventory to promote the service. We have embarked on an aggressive branding and performance marketing campaign, and we are seeing efficient sac as I noted earlier with the stack so favorable to <unk>, we expect to lean into this opportunity in a greater way and we now expect to see greater incremental next.
On a prescription losses than the $200 million to $300 million. Initially described this could potentially be a couple of hundred million more but it's too early to pinpoint a final range I am very confident to categorize. This as success based spending we do however, still see 'twenty 'twenty, one is representing the peak year for losses from our investment initiatives.
Next generation.
Which brings us to capital allocation, where our first priority is to reinvest in our business to drive long term growth on shareholder value and for the near term. The most productive use of our free cash flow will be to drive discovery plus subscribers. Thus you should not expect us to be in the market buying back on our equity in the near term, though as we gain additional.
It's pretty around breakfast, it's been to support a rollout we will of course revisit the buyback.
We finished 2020 at approximately three three times net leverage through 'twenty and 'twenty, one due to timing factors around spend on the Olympic games, our leverage may at times trend above our target range, though we and the rating agencies are comfortable.
Clearly with this outlook, particularly as we remain committed to our investment grade rating.
Now turning to a couple of housekeeping items to help you with forecasting 2021, we expect our effective book tax rate to remain in the low 20% range, while our cash tax rate, excluding PPA will be in the mid 20% range and finally.
Comfortable we are budgeting FX to have a positive $170 million year over year impact on revenues and a neutral year over year impact on EBITDA.
In closing we are incredibly excited by the initial success of discovery, plus and remain as enthusiastic as ever as we position the company for long term sustained growth.
Clearly lots more to.
<unk> given only a few months in and we look forward to updating you on our progress.
You again for joining us with that I'd like to turn it over to the operator for the Q&A portion of the call and David J P and I will be happy to take your questions.
Thank you.
Ladies and gentlemen to ask a question.
Accomplish star and then one on your Touchtone telephone.
Question has been answered or you wish to remove yourself from Nikhil, It's Brad.
The film team once again to ask a question. Please press star and then one at this time.
And on first question comes from Robert Fishman from Moffett Nathan Your line is open.
Hi.
Let's put it on.
Can you be a little bit more specific about the cadence of the international rollout for discovery plus in the next few months and have your partners like Vodafone really started to ramp up on the marketing to their sub base yet.
And then while clearly still early anything you can help share on the international monetization of the <unk>.
Skype.
Hey, good morning, if youre seeing higher RP levels there.
To your linear subscriber base. Thank you very much.
Thanks Robert.
And as I mentioned, we're really just getting started we built a robust platform, but in order to roll it out globally it needs to be modified it needs to be modified to be.
Based on your embedded with Vodafone to be embedded with telecom Italia each of the different distributors.
Working on getting to an embedded with with a number of the cable players domestically and around the world. We have rebranded D play discovery.
Discovery, plus as you know our strategy outside the U S, which we think is really unique.
Local entertainment local non fiction local sport in Europe, and local entertainment local non fiction around the world and that library from the last 25 to 30 years of local content really differentiates us from Netflix and Disney and makes us.
A great companion.
You're putting together a bundle. So we are seeing some real growth in the few markets that we've launched and we are using the Olympics as a forcing mechanism, where we're looking to rebuild the platform.
So that coming out of the <unk> that we're ready with the Olympics all across Europe, and then coming out of that we'll be able to rollout.
But you know for instance, Vodafone will not be for a little while but Jamie why don't you give some more specifics yeah. So.
Robert as David mentioned, we are obviously undergoing a significant amount of work to re platform and basically what that means is our front end product that was the former D play product in Europe was built on a different.
Out on.
Platform than our U S product and so as we do two things one is migrate the U S product to be our global product. We have some important kind of infrastructure work to get done here in advance of the Olympics and number two as we talked about back in December we will be collapsing our eurosport player product into discovery, plus and so we need to.
Different so do some work to incorporate that product into discovery plus both of those things.
Our primary focus on taking up a fair amount of our engineering and product bandwidth over the course of the next four or five months pre Olympics, so thats going to be the primary focus on getting that right in the first half of this.
As we come out of the Olympics and go into the second half of the year, that's when you're going to see the acceleration of the international Rollouts and so thats the timeframe I think about.
On the.
And using Vodafone specifically since you mentioned it really that will be a back half of 'twenty one.
And even bleeding.
This year level markets into 'twenty, two as well as we launched with them and then the third thing in terms of <unk>. The only thing I would say there is.
What we do know and what we've seen so far is.
These retail partnerships with Vodafone and others as well as our direct to consumer.
The premium on the multiples over our wholesale model and internationally are still easily three to four ex the pricing that we see in our existing wholesale models. So we see a lot of pricing advantage.
And.
On the discovery plus model and the partnerships we have versus our.
<unk> business.
Great. Thank you both.
Thank you. Our next question comes from Steven <unk> from Wells Fargo. Your line is open.
Yeah. Thanks.
First just wondering if you could update us on what sort of ARPA trends youre seeing on.
How those are performing versus your expectation and maybe how those split between U S and international and subscription versus advertising and then David I was wondering if you could give us an update on Magnolia in terms of timing and you mentioned the Olympics and the golf season, but are there any other big content events.
On discovery, we should be mindful off during the year that might drive subscriber acquisition on discovery plus.
Yeah.
Sure why don't I start I'll start with Magnolia chip.
Chip and Jo have been huge supporters of discovery plus for.
For the audience around the world.
Particularly here in the U S.
<unk> with the fact that fixer upper is back on.
Magnolia table with with.
Joe.
Really strong in all exclusive to discovery plus.
As well as the slate that we've been developing in May as chief Creative officer have have been creating is on discovery.
Delight. The good news is there's a huge amount of incremental content coming from them as well as all the content that we were putting on Magnolia all of that will continue to be on discovery plus.
We've come up with a really creative partnership because Magnolia itself is a huge business.
Plus for them.
Transactional business and so we will be launching an app together, where people can go and take all kinds of classes.
They could they could they can do workshops, they can transact business with the Magnolia product they can transact business with.
Business, a number of things that chip and Jo will be curating.
But all the content that's developed will be on discovery, plus so effectively when it launches whatever number of subs that we have will be subs that'll have the magnolia app available to it. So it's really a win win it becomes effective.
With the part of us.
And we become part of them they become part of us and it's a one on one equals two.
Okay.
Steven Let me take the question on <unk>, So a couple of points.
What we're seeing so far and remember it's early days, but starting with the U S.
<unk> I think the most important point that I've looked at is our ability to monetize the advertising side for the for the AD light subscribers and I'm Super pleased with what we're seeing there and we had this this bogey of getting three times, the CPM compared to sitting here.
On a on a very good track here, we're already making more on a per.
Basis.
Altogether with these <unk>.
Subscribers compared to the linear ecosystem. So that's that's great you know obviously the price points for for the AD free product and I should say that interest.
Airbus is skewing, a little more towards AD free given the relative attractiveness of the of.
The price point here, I think but so for the U.
For sub debt.
So far ahead of expectations internationally as J P said, the most important point is we're expecting a multiple.
The delta between what we're achieving here on the direct to consumer side compared with linear but I also want to say, it's early days on especially on the international side driven by the deal cadence that's going on that number could move around.
And that's why you're not going to hear us talk a lot about <unk>, specifically I would like you guys to focus on the next generation revenue. That's why we gave the growth guidance there and it's a it's a very compelling story I think we grew 18% in 2024th quarter was up 26% for next generation revenue.
We're now looking at.
Roughly 50% for the first quarter and I expect that number on that growth to further accelerate as we go through the year. So.
<unk> talked about it I think are very very encouraging from first results here. The one other thing Gunnar.
And I might add just on for the international is that.
Based on the success, we've seen in the last 40.
Stays on the U S AD light product, that's really not a product that we've rolled out anywhere internationally and we see an opportunity there to take that same model with the same higher <unk> and.
I'd take it around the world and so as we part of the re platforming, we've talked about just a minute ago is going to enable us.
Five buffer on add light and an AD free product as we take discovery plus around the world and I think in a number of markets, particularly in Europe with our big advertising footprint. There that we think theres going to be additional opportunity for higher ARPA growth with both both products in both tiers in market at the same time.
Alright, thank you.
Thank you. Our next question comes from Doug Mitchelson from Credit Suisse. Your line is open.
Oh, thanks, so much and congratulations to David on the team on the successful launch.
A couple of questions for for Gunnar a couple for David.
One of the things that seem pretty conservative on the analyst day was your target margin of 20% for streaming is it fair to say you're pacing well beyond that given some of the metrics you laid out in <unk>.
And if you through all of this into a blender what kind of margins would you get on sort of a terminal basis for streaming and a clarification. Gunnar you said cpm's were up 40%.
The upfront one can be set up mid teens year over year.
Not to be sort of two two in the weeds, but is that sort of booked to date or is that your anticipation of how the quarter is tracking including you know the March period last year, where it where it fell off in.
For David.
You know what when you think about the usage of the research you've done so far.
I know it's early days, how do you feel about the idea is this is this super fans coming in and in racing to try your streaming service is this just you know a mix of subscribers that you think is.
Sustainable normal and not overly driven by super fans or what's your anticipation there and then lastly, David if you wouldn't mind on on content on investment it seems.
Oh, Mike at least Archrock and Youll tell me how far off we are it seems like shows representing about 9% of your linear viewing has seen their original debut on streaming is that sort of the right make sure you're thinking of ramping that more aggressively or is the original is that you have coming means it means that the linear it's going to force.
First day with the content level that it has right now anyway. Thanks for all that.
Sure.
Thanks, Doug.
Right now it seems quite broad where getting subscribers from our broad marketing, we're seeing subscribers coming in from from our own marketing on our own platform.
<unk>, we're seeing a lot of digital.
The age is real.
Across the board a lot of that has to do I think with the great work that Disney has done and Acclimating people.
The encouraging thing is that we see good numbers about people once they know about the product wanting to have the product.
And we're one of the reasons that we're marketing is.
<unk> got a great product and we need more people to understand what it is.
For 60 days in with a product called discovery plus we've had to do a lot of work. It's a great brand that people love, but we had to explain that its home food chip and Jo crime.
Oprah Winfrey, and there's all of this.
I think like all the stuff that.
On the people that people like so that was number one the role to pay has been terrific.
On the amount of time people have been spending on is terrific and so right now.
It looks good we can't tell you how big the market is but right now it feels like we're often running.
<unk>.
In terms of the content that we're moving around we're really experimenting.
And the interesting thing is the way our product works. So far is it's very different than Disney on Netflix.
We have this massive library and when we say what's trending if you took all the top shows that.
Andy and put them all together.
Represents less than 10% of what people are watching and so it's Peter.
We have such a diversity of content when you talk about.
Scripted series and scripted movies, where you have eight people playing that game, they're going there for a scripted series and they tend to where they're going there for for a movie.
For us since we since we've pulled together that other 50%, they're watching discovery stuff, they're going in and watching Prince William and environmental documentary and other people are going in there and watching the fact that we have the largest crime library of paranormal or food fans. So are we.
We're just experimenting we're moving.
Moving some we're moving things around but we still have.
A full commitment to the existing bundle we are the bundle I mean, it's basically newest sports and us and a lot of the other players are now in their in repeat mode and for US we have a real equitable argument I was talking.
The.
With.
Our operators over the weekend you know about the amount of original content that we're still doing in the amount of you know the amount of viewership that we're getting on.
On the platform and so we think we can do both and we're experimenting moving things between the two.
Alright dragging on.
On your other two financial questions here the March.
Some of them I mean I gave that.
At least 20% number because I was very very confident that we'd be able to hit it.
If you look at what we've learned since then every metric has come in better.
So I think it's safe to say that that's even more conservative from today's perspective at the same time, there may be some sort of pulling in.
Impact forward ourselves.
<unk> line and are positioned to give a new estimate now we're focused on building this product out and optimizing.
This now, but I feel very very good about the margin potential on the long run.
And then on the on the CPM side, just to clarify the 40% or based on what we're seeing in our bookings.
I think that was once you're on.
Alright.
Yes.
But also the mid teens year over year is that like Tracy pacing that gets the full <unk> of last year were just bookings to date for the quarter.
That's based on the on what's on the books right now for the same for the same period of last year, but as I said I mean, we do as I said a couple of minutes.
The question, we expect a modest headwind because we're using some of our inventory for our own promotion, you'll have somewhat limited visibility et cetera, I'd keep that in mind as well. Please thank you Bob.
Thank you. Our next question comes from touch on morale from.
Do you see capital market. Your line is open.
Great. Thank you for taking the questions first you are clearly more bullish on DTC today than you were maybe just a few months ago youre ramping investments even more early subscriber kpis found very attractive whether it's <unk> churn I guess I'll give it another shot and ask if you'd be willing to provide any thoughts on what DTC subscriber.
<unk> levels, you expect to achieve whether it's U S or international or 'twenty, 'twenty, one or even looking out further just any framework would be helpful. And then secondly, how do we think about the go apps and what that business looks like going forward as you ramp and pivot even more into discovery plus thanks.
Let.
Talk about go which is really.
Our Avon, where we're getting terrific CPM.
Okay.
It's been a great feeder.
A really terrific terrific feeder for us.
Which is really an efficient conversion.
And it's really we have a holistic.
Stick view here.
We have our traditional business with great margins, where we continue to which we think the outside the U S. It's it's it's declining but at a at a much slower rate than in the U S. But in the U S. We're seeing some stability and we expect that it will decline, but we really like our position.
Position, there and we have the go a bot.
Where we have a very young demo on a very good economics.
And people continue to go there and the more people we can get to go there the more people can come over that want to get our S. Vod service, which has a lot more stuff.
So we think it's a really like a great 123 combo.
Commvault and for advertisers it's terrific.
So we're going to continue to look at the at the market and as J P said were evolving.
We have a very low priced product given the marketplace. It's an unbelievable value. If you look at the value of us at 490, and I didn't add light versus everyone else with the library, we have in the original that's.
Terrific outside the U S. We can go a lot cheaper than that and still have a multiple of the <unk> that we that.
That we get but as J P said, we're learning we've been at this for five years. That's how I think we took so much time to launch to figure out how do we get everything aligned but the idea of Avon ASP on AD light.
And now we're gonna add S Vod with the with with with low commercials, but will also on some markets we might want to put in a big front porch of a bot and we've been doing that on a couple of markets already and finding that that's a real feeder and the fact that we have advertisers Ingo gave.
That's one of the reasons, we have 100 advertisers from discovery plus right now so who knows where all this will be in five years right now.
We have great on approval on our existing business domestically and around the World will get started we're way ahead of where we were and we like the metrics and we're going to we'll just follow the consumer need I don't know J B, just maybe a little.
On Avon from your perspective.
I think the interesting thing back to David's experimentation point.
Is that we have we have done some things even in the course of the last 60 days, where we initially.
Took down some content that was originally on go and then put it back up on I guess, the point would be generally to.
One of these are just incredibly.
Additive customer segments I think we look at each of these as being very additive customer segments and the go performance so far even in the course of discovery plus.
Continue to see the same high level of engagement as we had free discovery plus launch as we have post.
David Sorry, plus launch and so from a from an engagement perspective, all indications or which was again a little bit of our thesis back in December which we obviously didn't know 100%, but this could be not an either or but on an.
And it's so far it is looking a lot more like an end.
So we might have expected back in December and on go we're still very pleased with the engagement and the level of.
Usage that that platform is getting and we have some new product innovations that we're going to be rolling out over the course of the next couple of months that we think will continue to make that product ever more compelling and so we feel comfortable with that that business continues.
Even though we are.
Good growth healthy growth driver force going forward.
And then maybe just just to.
Those are the last question, we're still not in a position to give a long term on short term subscriber guidance here, we're super Super happy with what we're seeing.
Again, you know top to bottom ahead of.
On <unk>.
We have a lot of distribution still coming down the pike.
We're really just getting started internationally.
That's on the positive side.
I don't think Theres, a lot of value of us sort of discussing scenarios here.
Understood. Thank you all.
Yes.
Thank you. Our next question comes from Ben Swinburne from Morgan Stanley. Your line is open.
Good morning.
David I wanted to ask you about your sort of content plans as you look at linear versus screening in the U S. I mean, I think of discovery you've been probably.
Most deliberate I.
Balancing what you deliver to your M. D. PD partners with what you are now building in streaming as you as I'm sure you'd agree others have gone much further sort of creating competitive products.
Given the success so far in the U S. I know, it's early but also that you hinted at a cable partnership in your prepared remarks are you feeling more optimistic are comfortable.
They can be on putting your best IP.
On DTC versus linear in terms of exclusive of the other things that just give us a sense of your mindset to sitting here today and then Gunnar.
Gave some advertising commentary for Q1 I'm just wondering if you could talk about the shape of the year, obviously, the comps get pretty easy in Q2, Q3, and then would you be.
So that's what the Nexgen revenues were $8 last year. Thank you everybody.
Thanks Ben.
Okay.
One of the great things as we get to see what people what people watch and how they watch it and what they like and I would say I wouldn't say best I would say different we're continuing to invest.
I wanted to get our traditional channels around the world and that's building on our global IP Library.
And so we'll continue to do that it's still a great model.
And we think it's going to go on for quite some time. It's also a terrific theater. So the people that are watching our cable channels are buying the product people that are going to go.
And in some of the product that they've downloaded and they like they're buying the product.
So we.
We think it's a really advantageous to us to keep that nourished and it's good for us with our existing distributors because they appreciate that and that we're keeping that were key to the bundle.
We're supporting it.
And so having said that there were a number of things that we're learning like if we do a big crime documentary a big crime documented we could put it on I D and we have put it on.
But they some of those things are they want to watch it when they want to watch it when we did the Prince William documentary on the environment on discovery I think it would've done well.
Unbelievably well in in on discovery plus.
Everybody wanted to see it.
Same thing with Attenborough, I think a lot of the stuff that we have.
Some of it is different.
But we are starting to get some clues on the kind of things that people like to have on our platform and watch whenever.
It Didnt want it.
Whenever they want we also have seen that we're getting a lot of comments that debt. This is a service that people could could watch sort of in two ways. One is.
While there while they're cooking they can we added a feature where you can.
Almost like a synthetic channel.
They were if you love Fixer upper and you'll love the property brothers and your Love Guy Fieri, you can just put that into the put that into the app and that's what that's what our run all day long and so on the one hand, you may really want to watch the attleboro on this great crime documentary or or Ina Garten is doing a great show with Melissa Mccarthy.
<unk>.
But you also may want to just put it on so.
Something really fun that you love to watch while you're cooking on why your homeschooling the kids all while you're working and a lot of the S. Vod products are have are therefore intention.
Where you have a full on focused intent to view, which.
The cash and we have great content, great characters, great brands, but we also have this ability to be a companion.
The content is on and it's a great companion for you when you're home or it's quite companion, we have your favorite show. So it's a balance and we're looking we think we can do both fantastic differentiated content.
That people love and also the content and characters that they love that they can hang around with all day, remember food and HG and I D.
Together with Fox news of the four.
Our longest length of view cable networks in America, with our three being women and Fox news being men and.
Reason for that behavioral people, sometimes want to have that on during the day and they can do that with our app and so we think both of those provide a value equation.
And then in terms of advertising.
I mean.
Visibility is still limited I'm not in a position to come up with a.
There is or where the full year outlook here, but obviously you are right that the comp should start looking a little better.
From Q2 on we've seen the sequential improvement and as I said earlier some of the international markets have actually already been have already been up.
In Q4, and we see strong momentum into Q1. It is it is early I mean.
We told you about pricing, we do have a great upfront deal in place on.
<unk> are often cancellations are looking good right now, but again, we don't have a ton of visibility. So we'll see but hopefully the balance is going to skew positively starting starting Q2 here in terms of the nexgen.
Revenue.
Just what we did we did we were able to make some two meaningful hires.
That have really been helping us one is we hired the head of sales.
For for Hulu.
Yes, Tim Keller, who is really terrific.
We have a great team, but how do.
Next Gen of ourselves to the next level and then we just hired last week the head.
Head of partners from whom.
On the CMO from from Hulu to come over and so we've brought over a lot of expertise here that we think in terms of selling our product selling the digital product getting someone who has years and years of experience of just doing.
We take that together with the very strong teams that we have in Stein loves doing a fantastic job and then take the great marketing team that we have with all the strength you have seen the campaign and bring someone who's been doing just subscriber acquisition for the last eight.
Eight years.
It's going to help this company really.
<unk>.
Growth.
Okay.
Again next generation revenues 800, roughly $850 million in 2020, and again that was a growth of 18% versus 2019 accelerating in the fourth quarter to 26% accelerating in the first quarter now to roughly 50% on an accelerating from.
And to be quantified, but it's a it's a great story I think.
Thank you.
Yeah.
Thank you.
Income from Jon <unk> from UBS. Your line is open.
Okay, great. Thanks, guys, maybe for Gunnar just some clarifications on some of the cost.
There you talked about.
Spending some more on the content spend I think you guys have spent about $3 billion a year. The last couple of years. So can you give us a sense of the magnitude of the increase there and then on the guide and any chance you could sort of bucket some of the areas debt.
Debt you might spend.
Moving into DTC with that incremental.
<unk> $200 million and can EBITA that'd be great. Thanks.
Yes.
So starting with content spend to two things to keep in mind for this year. One is the Olympics is going to flow through with a very significant license fee of course in the third quarter.
Other than that the content spend on a consolidated basis.
After tire company is growing significantly that is part of that.
Our guide that we have given obviously with a focus on direct to consumer first product, but keep in mind as David said, we're experimenting with those windows for our content and I think one of our great advantages has always been our ability to use that content across territories across platforms.
And thereby further driving that efficiency, but so that's one of the one of the chunk that had always been part of his guidance I think in terms of what we see additional spend right now first and foremost, it's marketing and again I mean.
I said it earlier, but.
Given how.
Our engagement churn metrics on the monetization.
They are trending.
Our customer lifetime value looks much better than what we thought it was going to be in December and at the same time subscriber acquisition has been incredibly efficient.
Better than what we planned for so that gap between customer lifetime value on Sac is just very compelling and that's the largest.
Metric.
For us to really lean in and spend more on the marketing side all the way through the funnel initially a lot of top of funnel marketing, but we'll definitely keep.
Firing on the performance marketing side as we go through the year here and then in addition to that on.
The technology side as well there is a lot of fast follow.
Drive features that are in the pipeline of the team is working hard JV already spoke about re platforming.
There is some work to do internationally as well.
But again all of that is going to help us accelerate the rollout here, it's going to help us accelerate the advertising growth, David already mentioned binge ads and pause ads and interactive.
Ads et cetera that are that are.
Coming down the Pike as early as March April may et cetera, So it's very exciting.
Sitting and.
Again from a from the CFO perspective.
Gives me a lot of comfort as Theres a success based spend.
We're going to toggle it up and down.
With what we.
In terms of the <unk>.
Performance of the product and again I could not be more excited about this being the best use of our free cash flow right now.
Okay. That's good.
Thank you.
And our next question comes from Rich Greenfield from Lightspeed Partners. Your line is open.
Hi, Thanks for taking the question.
A follow up to a couple of questions I've been asked when you think about the discovery plus product to date.
When we look at it.
The top 13 shows have been sort of shows that are on television or on linear TV led by travel channel Ghost Adventures.
The one that's been exclusive to discovery plus has been actually fixer-upper from chip and Joanna.
I guess two thoughts come to mind, one do you think your services uniquely less exposed or less need less original programming and other streaming services because people like watching your catalog content.
If you run over two do you think that fixer upper sort of point you in the direction of maybe chip and Joanna shouldn't be launching a cable network and it should just stay exclusive their content should say exclusive to discovery plus and then just the last piece of that you mentioned pausing the share buyback to invest in discovery plus I.
Or given investor excitement over your stock and the huge move you've seen on your stock year to date, why not take advantage of it actually sell stock strength in the balance sheet and actually invest even more in programming.
Again, maybe you don't need to spend that much on programming given what I mentioned before so I'd just love your views on that whole subject.
Sure.
Yes, let me start with the content.
We've never met May made our entire library available before.
So one is there's a lot of excitement about being able to sit down and watch old myth Busters look on all the seasons of deadliest catch.
Ice Road Truckers go back and watch a bunch of lifetime movies, all in one city.
So we're making available this whole bucket of content all the food to go back.
<unk> spend an afternoon watching diners and dives so there.
There's a lot of appeal in our full library to different huge amount of original content that is on there that's doing really well the metrics are really not the same for us.
If you take those 12 top 12 shows that's less than 10% of what's viewed on the platform.
So.
I'm not on the inside of these other rest vod platforms, but when they when they launch a big movie or are they launch a big series if they if they named three it might be 30% of the viewing of 40 per cent of you.
For us it's less than 10%.
So our product is a lot of long tail when you.
A lot of the original content is very helpful. I think because it makes it is clear that it's differentiated we one of the reasons why a lot of people that have go.
Moving over and paying for this product is there's more there than theirs.
From a original content.
So I think we think we were onto something with the mix.
We're not being guided that much by seeing that they are watching this show of that show because when we actually look at the full numbers.
The answer is that they we've represented 50% of what people watch on TV and that's not.
As a tumble anywhere else you go to the others for scripted series scripted movies.
The big takeaway for US is people are willing to pay for that other 50%, so far and that could be yes.
Yellow brick road for us.
And rich I mean on the on.
On a share buyback side remember, we have so much free cash flow.
Coming coming in right. So that generates a lot of firepower to fund our organic acquisitions on the on the leverage side as I said before I'm on.
Feeling very good and not only I'm feeling very good agencies are supportive as well and.
The reality is we have less than $4 billion coming due over the next five years after our.
Prepayment here, that's going on in March right now so I think we're in a very good position. We are prioritizing the reinvestment into our own company right now, but not in the form of buybacks, but in the form of future growth.
And what about chip and Joanna.
David If I took oh.
As I said, we've done a very.
A very innovative alignment together.
And youre going to continue to see content on discovery plus exclusively.
On there.
There may be a window, maybe we think linear is still valuable they produced a lot of a lot of good content.
But you'll be.
Seeing a tremendous amount of of content coming from them and coming from their creative factory there'll be on discovery plus exclusively or exclusively for a period of time before it shows up somewhere else.
I think the only other thing I would add rich to your comment about the franchises as debt.
I think one.
The successes we've found you mentioned the top shows in how many there's a lot of the top shows on discovery plus right now that are.
Talent existing talent are known talent are known franchise base. So you take a <unk>.
Magnolia table or a bobby and jobs in Italy, or even some of the of the offshoots of the.
With franchise and I think that's one of the things we see as a great success is ultimately being able to super serve and give people even more but that stuff is exclusive to discovery plus and so while it could fit naturally in a second window or down the line back on our network because it's very it's.
<unk> 90 day complimentary to the existing franchises. They are exclusive to discovery plus so we do think.
In order to continue to expand the base also that.
That will be important to have a right balance certainly some of the library and the depth of the library is incredibly important but also some of the exclusive content. Even if it is based on some IP and franchises that have come from the TV.
Envision.
Networks and outside the U S.
We're finding that with our local language local sports strategy that having a particularly compelling piece of local IP. That's.
It's available exclusively.
He is driving I mean speak to that a little bit J D.
It's very we're seeing real growth in Poland, when we take.
Particular piece of compelling local IP and.
Put it just on our our discovery plus product yes.
<unk> with.
We did think and on a positive what we outlined is what we thought was sort of part of our secret sauce back in December.
With this combination of great local IP with the strength of the global Library, we are seeing that bear fruit, which is.
A lot of the local IP that is whether it be in Poland. The nordics the U K, Italy.
Is what's driving a significant amount of volume.
The service and in terms of the acquisitions and then coming.
<unk> service, finding and discovering all of this new and great content that people have never seen and I think the other thing. This is true about international. It's also true about the U S is the reality is the 55000 hours is such a large volume of content in the genres and passion areas that people love.
Without.
In total.
Digital algorithmic recommendation engine to surface that stuff to people. It's just never something that could have been perfectly exploit it on linear television when you have a $24 seven channel on you are limited by capacity and so.
And by the way that re platforming that we're doing internationally is partly to take advantage of these more sophisticated.
Out of Emendation, we ended per engine, we have on discovery plus that currently doesn't exist in discovery plus outside the U S. But will once we finished the re platform so that servicing of new content, even if it's out of the library that feels new to so many viewers. We think is also a big opportunity to satisfy the consumers.
<unk> very helpful. Thanks for the details.
Thank you.
And our next question comes from Alexia <unk> from Jpmorgan. Your line is open.
I think you just got two quick questions. If I may the first one is are you.
Can we expect you guys could even get a higher proportion of advertising budgets given the incremental reach of Disney plan. It sounds like it's a very attractive.
Offering you can provide us just kind of lead the company to advertising I'm curious if there's any incremental thoughts there and then the second question is just really on on local into.
Production.
Are you seeing that getting a bit harder or get more expansion now that you know discovery plus and other a lot of other streaming services are trying to build that on local content.
Thanks, Alexia on the AD budgets.
Getting.
Internationally, even before we get to discovery plus with our traditional business.
What <unk>.
It has been and his team has very effectively done and he and I have been on the road with them.
With all the big agencies at least three times over the since the Scripps deal is dealing with the fact that the broadcasters are getting over.
Back to over $60 CPM, and we were getting a third of that.
And but but we're the number one player for women are the number two player for women and we have we are the number one network with TLC. We have the number one show with 90 day fiance, and so we've been pushing that rock uphill and Youll see in our numbers, how we've been driving that CPM.
Now we have a whole basket, where we have this win win have come in with us for $40 plus.
CPM why are you going to get a repeat on a broadcast network. When you could buy original content on us and we get a huge premium on our CPM. We believe that this should ultimately flip that aside from sports.
But we should be getting a premium versus the broadcasters.
Because we're producing we have length of view, we have we have an audience that is engaged we havent debt mix with food and home where advertisers want to be and so we think we have some real momentum there.
And we're going to push on it because I think we think from an equitable perspective.
And from a performance perspective, we should see much more of that money with much more CPM with better returns and we think advertisers are starting to agree with us and you should see that flowing through over a period of time and with go and discovery plus we do have a lot more opportunity because with discovery plus bigger.
<unk> thought with go continuing to perform we have more capacity.
And we're seeing that the attractiveness of that capacity in terms of the kind of premiums that were getting in CPM on.
Discovery, plus where there's only a few adds is really terrific. So it's and it's incremental reach.
<unk>.
Bigger than where mental reach for us.
Non cable.
And so which is quite helpful.
And on on the on on the local.
Leaning in we do need original content, we have been doing at JP has been producing a lot of it in every language. We have the factory that converts all of our content.
<unk> inquiry language, but we are doing more original because it is helping us both on linear and direct to consumer but JV talk about how we've kind of pivoted this year to lean in even harder I think I think certainly in the core markets with the biggest scale will continue to sort of pivot on and focus on on the right level of local content to drive the acquisitions.
And the other thing Thats exciting for us that we've never been able to take advantage on them in a material way as we have.
Now even in the last 90 days examples of shows that originate out of one market that our top 10 or top five in some cases drivers in other international markets and so when we talk about local content local content used to only.
Only mean monetization in one market. The reality is now we're starting to see more value and benefit being driven at local content multi market. So we did in Estonia documentary on the terrible and tragic cash sizing the largest share disaster in the Nordics that was originated out of our Nordics business. It's now on top performer in the U K a top performer.
In Italy, and so local content investment doesn't just mean local it means local with value now to travel which is something that we never had so we're excited about that opportunity as well.
Thank you.
Okay.
Thank you.
We will take our last question.
Michael Morris from Guggenheim Your line is open.
Hey, Thanks, guys. Good morning, I'll try to sneak a couple on here if I could first can we talk a little bit about the affiliate pace domestically and especially the strength you are talking about in the first quarter. The 5% that you saw on the fourth quarter that seems to all be coming from the linear.
Your business and I'd appreciate if you could talk about.
What drove that acceleration I know, we talked about a little bit of the improvement in subscribers, but really it seems like you.
It would have had to have some kind of pricing discrete pricing improvement there.
So can you just help with that and how much that impacts but that underlying pace.
As we go into the new year and net growth you're expecting and then just a couple on.
On international digital if I could of the 5 million subscribers <unk> subscribers you discussed in the fourth quarter. How many of those were D play subs that sort of became discovery plus subs on.
On the conversion and then.
Can you talk about India and your product in that market at all where you are on that and if that contributed to your reported numbers. This quarter. Thanks for taking the questions.
Okay, Michael Let me, let me start with the with the distribution guidance and you may have noticed that I deliberately said distribution rather than.
The last thing because I do not want to create the perception that our.
Traditional affiliate number is accelerating by 100%. So you understand right we were up 5% in the fourth quarter on that was almost completely traditional business driven it's a combination of pricing.
Slightly better subscriber trends.
We've lost less than prior quarters and also we've done very well on the on the side of the virtual Mvpds. So so that's the that's the Q4.
Number mostly linear for Q1, we're talking about high single digit.
Potentially double digit than a lot of that acceleration is obviously coming from the D to C trends given.
Affiliated fiber success that we've seen so far that is going to start very materially contributing to that number that's why I started talking about distribution the way we laid it out.
Our financial statements as well rather than just affiliate.
On on India as well.
Yeah Yeah.
Given this.
On the international Michael to your question on International.
Vast majority of those subscribers are discovery plus.
So and if you add in the Eurosport player, which will convert it's really you know.
The vast vast majority of subscribers. So that's number one number two on India.
Look it's been a nice business has grown for us nicely, but it remains in terms of obviously the logical questions on that being a lower our per market.
It is a it remains a small piece of the overall on a single digit level percentage of our international portfolio today. So its a nice its grown nicely, but it's.
It remains a smaller part of the overall international subscriber story.
And Jamie just to be clear that.
I'm trying to reconcile the 5 million subs and the part that you said the vast majority were discovery plus I guess are.
Are you seeing the majority of the $5 million that you guys discussed.
<unk> converted to become discovery plus more than more than half of those 5 million correct.
Okay. Okay, that's great.
Thank you very much for that.
Thank you, ladies and gentlemen that does conclude the question and answer session for today's conference.
Ladies and.
This now concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.
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Gentlemen.
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