Q1 2021 Discovery Inc Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Discovery, Inc. First quarter 2021 earnings conference call. At this time all participant lines are in a listen only mode at the conclusion of the speaker's presentation. There will be a question and answer session also please be advised us today.

Conference is being recorded I would now like to hand, the conference over to Mr. Andrew <unk> Executive Vice President Global Investor strategy third you may begin.

Everyone. Thank you for joining us for discovery Q1 earnings call. Joining me today are David Zaslav, President and Chief Executive Officer.

Leading belt, Chief Financial Officer, and JB, Perrette, President and CEO Discovery networks International you should have received a copy of our earnings release, but if not feel free to access it on our website at www dot corporate debt discovery Dot com.

On today's call, we will begin with some opening comments from David and Gunnar and then we will open the call to take questions before we start I'd like to remind you that comments today regarding the company's future business plans prospects and financial performance are forward looking statements that we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge.

And assumptions about future events and they involve risks and uncertainties.

Cause actual results to differ materially from our expectations.

Good day.

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.

Good morning, everyone and thank you for joining us today to review, both our Q1 performance.

The meaningful progress we are making since our launch of discovery for us.

Across our operating segments brands in global markets I Couldnt be prouder of how our company has executed.

Near flawlessly.

Bonding with creativity precision and focus across the board while at the same time.

Accelerating the pace of innovation throughout our organization as.

As we embrace substantial growth opportunities around the globe.

We continue to reposition the company and put it on a path of sustainable growth for the long term.

Our ability to generate free cash flow is crucial.

Allowing us to fully fund our pivot and.

And underscoring the efficiency of our model.

Indeed, even during this moment of increased investment is.

As clearly evidenced in our financials this quarter.

Our free cash flow machine is working harder than ever.

And it is reinforcing and evolving narrative about discovery's differentiated hand.

With a strong global launch of discovery, plus we announced scaling a very well received global direct to consumer offering the.

To complement our incumbent linear channel presence in every TV market around the globe.

In Q1 discovery had the most watched domestic pay TV portfolio.

Internationally, we enjoyed an impressive seventh consecutive quarter of linear share growth.

Anchored by our 27th straight months of growth in our female genres and best ever quarterly performances in several markets, including the UK, France and Germany.

This growth was supported by the continued global expansion of our Scripps lifestyle brands and content.

We achieved this while simultaneously launching and building discovery plus.

Our continued strategic focus leverages discoveries powerful competitive advantages as well.

Well established consumer connections in every market in the world.

Vast local language IP ownership.

Deep and expanding distribution relationships.

Super efficient content production model.

To power, both our global direct to consumer expansion.

In our core linear business.

To achieve this we are investing more than ever before in our content across the board to support these platforms.

So far in 2021, it is all call us.

And exceeding all of our early benchmarks across almost every K pie.

We are pleased to report that just four months into our U S launch of discovery plus.

With the vast majority of our international expansion still ahead of us we.

We have 15 million total paying subs across our global direct to consumer base.

And we continue to move forward with strong momentum.

When I think about our $15 million record historic subscribers and cash today.

And the fact that we were able to add 10 million paying us subscribers since the end of last year.

Really impressed with our traction.

At the end of Q1, we cross 13 million paying global next subscribers, representing sub growth that compares quite favorably to our peers over the same period underscoring the value appeal and stickiness of our content.

All of which supported our conviction.

Our opportunity ahead.

But our sub count tells only part of the story.

We are equally encouraged by early metrics and kpis across engagement.

Churn.

And monetization and.

Particularly in the us.

Which likely place us at the very top of an impressive list of peer offerings.

Many of whom have had a far longer runway, thus far than we are.

Relative to pay has been between 80 and 85% of free trial subs.

Engagement is approximately.

<unk> per day per viewing subscriber.

And well ahead of linear.

So retention is strong.

Giving us confidence debt, while early monthly churn is trending towards low single digits.

Consumers clearly love discovery plus product.

We see that our social in the App store product ratings and the feedback from partners clients and talent in the marketplace.

Our app store ratings ranked us among the sector's top.

Our Apple App store ratings.

As for <unk> nine.

And based on a very large number of reviews.

Our strong early kpis are driving exceptional modernization.

Our $4 99, and light product with only four minutes of commercial time generated over $10 of RP in the quarter.

Already well ahead of our longer term goal.

And it's still trending up.

Our overall blended U S. <unk> of around $7 is already in line with what we generate in linear.

And we see healthy momentum for that figure to grow during the course of this year.

And on a global blended basis, we are seeing <unk> of over $5.

Gordon will provide some additional detail on metrics and kpis.

But in short we are working towards a subsidy.

Customer lifetime value, particularly as contrast, it against the cost to gain subscribers.

Encouraging us to lean in from an investment standpoint, when it comes to marketing content and technological capability in order to maximize this meaningful growth opportunities. We have an extremely focused approach on all the ways. We can be available to the broader swath of users, while driving a rich and Don.

NAMIC user experience.

Cornerstone of this will be expanding our partnerships with many of the world's leading distributors and platforms.

We recently launched our Comcast Xfinity flex.

Soon on Exelon.

Our deepening our relationship with Amazon around the globe with availability on Prime video channels in the United States and a global rollout plan for other PVC markets.

Now, let's look at Italy.

A great example of a market, where we see encouraging early signs of the long term growth potential against which we are executing our strategy.

Bringing together our market expertise strong local talent sticky original content management resources and relationships production and technology infrastructure and popular brand and channel presence like.

Like a number of other markets in Europe.

Italy is relatively underpenetrated with respect to pay TV.

20% was really one main distributor.

It has significant mobile penetration and usage and.

And we have discovery enjoys a healthy pay us free to air presence.

With debt and local in language content.

And though we have grown our audience share the existing pay TV market structure limits the upside from this segment of vehicles.

The launch of discovery plus us.

Catalyzed a new growth trajectory, our addressable market has grown more than 10 times from pay TV to now include mobile and broadband.

Discovery plus enables an entry cost for premium video that 75% plus more affordable than traditional bundles and.

Discovery, plus <unk> are already more than three times greater than our wholesale portfolio.

This is a powerful combination of potential universe and price growth.

What we are seeing in Italy, the ISR thinking on the prospects or our other international markets could look like.

There are significant markets, such as Brazil, Germany, and Australia with similar characteristics.

And where our ability to offer a direct to consumer offerings.

<unk> with mobile or multi platform operators should ultimately result in new customers higher rpms, and a deeper direct connection with us.

Of equal importance is the balance we have been able to strike across our linear and direct to consumer businesses.

Collecting on our Q1 performance, which by many measures is still facing COVID-19 related headwinds.

I'm proud of our team's ability to manage through difficult operating circumstances, and you will see that in our Q2 outlook.

Gunnar will take you through the details, but I'm pleased to note that in every international region seeing positive advertising growth for 2020.

With record shares in Q1, but major markets like UK, France and Germany.

We are seeing the great resilience in our advertising business not just internationally, but also domestically.

This taken together with very strong scatter pricing in the us.

In public spending across the globe.

US confidence in our advertising outlook for the balance of the year, especially with the growing discovery plus opportunity.

We couldnt be more excited to present to our advertisers at this year's upfront on may 18th.

At a time when our brand and programming has never been stronger.

More relevant.

At the same time.

Growth in both domestic and international distribution revenues will be boosted by discovery plus.

Net net we see a healthy inflection in our revenue trajectory behind the global backdrop of improving underlying advertiser demand.

And continued share gains, particularly in our international markets, taking a step back and assessing where we are as a company.

I'm extraordinarily optimistic.

We've gotten off to a great start with discovery plus.

Exceeding our expectations.

Okay.

And are effectively managing through a dynamic fluid and exciting time as I have ever seen in my many years in the media business.

We are encouraged by the engagement and reception to discovery plus from our consumers advertisers and distribution partners around the globe.

Underscoring the strength of our differentiated Inc.

This is an early tailwind that gives us great confidence as we lean even harder into our pivot.

Yet as important as discovery plus a success is to the future prospects of the company.

Of equivalent importance as our core linear business.

A foundation of the company.

And backbone of our strong free cash flow.

As we drive in channel.

Long term sustainable growth.

It is imperative that we nurture both sides of the company is interconnected and supportive to one another.

Thank you and I'd like to turn the call over to Gunnar.

After which JV Gunnar and I will take your questions. Thanks, so much.

Thank you David and good morning, everyone.

My aim this morning is to provide a slightly more detailed peek into the operating model as well as our near term outlook than we would normally do in large part given the recent volatile.

To the extent that this has created additional question vendor concerned my goal will be to help alleviate us up about as possible. This morning.

2021 is off to a great start.

David just mentioned and which I'll provide a little more context around when kpis, particularly in the US where we launched at the beginning of this year, the cross engagement monetization and churn and applied customer lifetime value continue to reinforce our belief that prioritizing investment in discovery, plus we 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 and 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 churn to trend towards low single digits over the course of the next 12 months.

Turning to monetization, which was also well ahead of plan.

Blended ARPA per discovery plus in the U S is already in line with our $7 linear buoyed by the strong monetization of the <unk> product for Arco has already exceeded $10 in the first flow.

Clearly strong engagement and watch time, despite offering only a four minute at Lowe and lending themselves to healthy advertiser demand and the term exceptionals.

Still early days, but we see a notable path for further monetization as we continue to scale and drive additional engagement attract additional advertising brand and rollout new advertising products.

Global <unk> is over $5 a day with international Arco is expected below that of the us.

This is in part due to the market price points and in part because we are launching a greater share of our subscribers coming through multiple partnerships, which drive faster adoption and marketing efficiency, but also coming in initially no arco.

That being said we are in virtually all cases are proof that our multiples above the existing wholesale linear ATP.

We currently monetize them.

This of course is a core tenet of our international discovery plus strategy in the break 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 for subsequent us 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% of that scale.

While it is still too early to formally update this number we believe there is meaningful upside to the target based on all of these initial indicators trending above our business case.

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 revenue set to more than double year driven.

Driven by both volume of subs and monetization.

We did invest heavily in marketing spend in the first quarter to support the us market discovery bust and rebranding deep 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 the funnel performance volume.

This accounted for the vast majority of it.

Total losses were roughly $400 million in the first quarter.

We expect a modest sequential improvement in Nextgen losses in Q2 as continued substantial marketing efforts to rollout additional territory and relevant content in tech spend will begin to be offset by more material revenue contributions also we expect to better optimize our refined marketing spend as we gained 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 us movements, particularly are impacted by rollout plans won't be Olympic games planned technology spend and platform integrations as determined by specific car.

That said, we continue to remain confident that 2021 will represent the peak year for us from our investment initiatives.

Of course, we are mindful as ever about the magnitude of these expenses the impact on our financials.

Again, we are reassured by the compelling return metrics against us.

Now turning to the segments in the U S advertising finished down 4% during the first quarter in large part future universe estimates put level of accounts.

Which ultimately translated into lower impressions across the industry and our networks.

That said, we continue to outperform our pay TV networks tiers on share during the quarter. Moreover, pricing remained robust scatter CPM developing strongly during Q1 and expected to be up about 30% year over year with roughly 50% premium versus upfront in Q2.

In fact total dollar volume for Q2 scatter will be up considerable growth here as we see categories, such as auto and travel coming back with us from the influx of DTC companies, including many new to television.

This conference plus had started.

Advertising revenue in Q1 and subscribers growth throughout the quarter and we expect an increase in tailwind from this component in Q2.

We expect U S advertising revenue to grow in the low double digit range in Q2 helped in part by COVID-19 Coms strong pricing and advertiser demand across the basin.

U S distribution revenue were up 12% volume.

At the high end of our expectations mid single digit linear distribution revenue growth continued to be supported by contractual sales decreases partially offset by pay TV subscriber declines.

Ascribed to our fully distributed networks declined by 2%, while our total pay TV subscribers declined by 4%.

Likely top of peer performance helped by additional network characterization affiliate renewals and continuing share gains or virtual mvpds.

We remain very well, Canada us across all key platforms.

In addition to our healthy traditional assortment with.

The launch of discovery, plus and the subsequent ramp up of subscribers accounted for much of the sequential acceleration distribution revenue growth.

During Q2, we expect reported distribution revenue growth will accelerate FERC, even against the much tougher comparison, given the significant one time benefit recognized last year.

Buying a significant acceleration on an underlying basis supported by similar drivers in Q1.

Turning to international networks, which I will discuss is always on a constant currency basis advertising grew 8%. During the first quarter is 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 lockdowns in certain EMEA markets. We saw mid single digit growth across the region with continuing share gains in key markets like the UK, Spain and France.

Finally, APAC was also up significantly during the quarter.

In Q2, as we comp a substantial economy faced by the advertising industry last year. During the initial stages of the COVID-19 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 ongoing discovery us subscriber base.

We expect international distribution revenue to accelerate to mid single digit growth during the second quarter driven by the same factors.

We called out in prior quarters, and we repositioned a number of key international distribution partnerships towards a hybrid type structure with optical trade nearer term upside on the linear portfolio for greater and term support for our DTC efforts.

Segment performance had already reflected some of the impact us over the last few quarters.

Turning to the expense side.

Operating expenses for the consolidated company were up 21% during the quarter cost.

Cost of revenues were up 2% largely due to the continued growth and company investment to support our next generation initiatives and the timing of sports content in Europe, partially offset by more efficient conference momentum.

SG&A increased 48% per 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 non core to our business.

Turning to free cash flow, we produce Q1 free cash flow per $179 million with enabled us to free cash flow conversion rate similar to the prior year quarter.

We remain confident and reassured and our ability to financial support all of our strategic endeavors, and we continue to convert at a highly efficient day. Despite the initial significant ramp in our investments.

We did not buyback any shares during the quarter as I noted earlier, we continue to view investments in discovery plus best fundamental use of our free cash flow in order to drive sustainable growth and shareholder value.

Further for the next few quarters, we also want to maintain an appropriate amount of financial cushion since the cadence of our global discovery plus 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 tentpole events for the marketing of our <unk> and linear Brad.

We will of course continue to update you on our views on capital allocation as with us.

Which quarter are.

Approximately three five times 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 available on free cash flow continued to be the key financial metrics and evaluate our operating performance.

We will however, provide you with the PPA impact each quarter as well as point out key noteworthy items to our calculated adjusted EPS number to the extent helpful for.

For the first quarter PPA was 32 per share.

Number two 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.

<unk> EBITDA in 2021, reflecting the strengthening of the dollar and Sterling since the start of the year.

We are operating on strong footing evidenced by our rapidly growing direct to consumer business and the resilient core linear business.

And our ability to convert AOS revenue free cash flow, where I continue to see at least 50%. This year has never been more valuable given the reinvestment.

We have a self funded business aimed at supporting an immense global direct to consumer opportunities.

We couldnt 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.

Ladies and gentlemen can ask a question please press star.

And the number one on your telephone keypad.

For just a moment to compile the Q&A roster.

Your first question comes from Robert Fishman with market May confirming your line is open.

Full year core U S affiliate fee growth after excluding nexgen revenues.

Our full year and then more broadly have you seen any pushback.

For launching discovery, plus and domestic affiliate fee negotiations and maybe if you can talk to whether the launch of discovery thoughts on Xfinity should be viewed as incremental or cannibalistic to your overall partnership with Comcast. Thank you.

Okay. So.

Good morning.

Let me start with that last question.

We're super excited about the upcoming launches here as you have seen in our numbers. If you do the math, we've been adding about $1 five subscribers on a monthly basis over the past two months here and I do want to point out that these numbers are going to be moving around a little but the the Comcast launch is going to be one very positive event.

And to answer your question I do think there is a significant incremental impact that's what we've seen with other deals coming online.

After launch so.

That should be a positive.

And we also look at other events happening internationally over the next couple of months that are struggling.

Further support the subscriber growth here, most importantly, obviously as the Olympics coming in internationally.

Thats.

For the for the subscriber.

Trend here to your other question on <unk>.

On the U S affiliate side again as I as I, just laid out we're super happy with the with what we're seeing for distribution across the entire.

Ecosystem here, clearly seeing very healthy and accelerating.

The contributions from discovery plus in our DTC efforts overall, but we're also looking at a very healthy underlying trend in the core business you saw the debt.

Linear subscriber numbers, which have again been a little better than that maybe over the average of the past 18 months or so with only 2% down an hour.

For our core networks.

And as I said, we've continued to enjoy.

Mid single digit growth here than linear part of ecosystem.

<unk>.

Your question about renewals and an impact of discovery plus look.

As I said, we are continuing to get a fee increases.

One other reasons, we have been able to continue the growth that we have delivered.

In the fourth quarter now in the first quarter.

We have been.

We're seeing very positive.

Discussions for the past renewals and four.

For upcoming.

Upcoming renewals as well as you have heard Kelly discovery, pluses and argument and those discussions, but it's one of many and to me. It comes back to just the rational.

Cold look at what the economics are and we are delivering close to 20% of viewership for our affiliates were a great partner, we're leaning in with investments. This company is investing as much in content has never performed this year and we're doing that and we're making that available to our affiliates and a very very competitive right and so.

Yes.

I don't want to make any predictions here on individual renewals budget those are constructive discussions.

<unk>.

And we feel that we're in.

And this is a very good position.

But the only thing I would add to that is the outside the us we've been doing.

Real partnership arrangements, whether it be Vodafone Sky, we're seen as a real positive.

And.

Frac that Comcast, Brian is a great operator.

Launched us on flex, we're not going to be launching on X one.

So we're 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 will that will be following on.

But it's not cannibalistic at all with Comcast they are able to.

Create value for us and for them by.

They have some.

They have some real entitlement their broadband leader and.

These channel stores have really developed and Comcast is looking in between flex and X one 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 channel is a 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 deal since we launched discovery plus and we've done very well.

And I just realized forgot to answer part of the question, we're not giving you full year.

Affiliate growth outlook here for for all the known reasons, but what I did say.

A little earlier is the some color on the second quarter and let me maybe elaborate on that so again, we delivered 12% in Q1 and I expect an acceleration off of this number and I'm not getting more specific here because to some extent it is going to depend on the cadence of subscriber additions on the DTC side, because as I said thats flowing through now.

Very significantly on the revenue side, but if you keep in mind last year in Q2, we had a very sizable one off items. So that's going to work against us here and when I say acceleration from the 12% I mean, despite that one off so on an underlying basis.

We will see this maybe this maybe an underlying high single digit growth quarter.

Which is going to come through as <unk>.

Sorry high teens high teens growth quarter, which is going to come through as an acceleration against the 12%.

Thank you Beth.

Your next question comes from Doug Mitchelson with Craig Your line is open.

Thanks, so much kind of hard to tell other questions here I think David David first for you.

How are you balancing content.

<unk> versus discovery Cros, how are you and versus the linear networks.

Any change in content strategy from what you've seen so far in terms of what be broken certainly non discovery process I think that's our number one I think number two.

Upfront looks like up 50% to 20% per CPM.

Every year. It's early we've got a ways to go but the setup looks very very strong any thoughts for discovery and comments on that and if I could tag on a quick one AD load at four minutes.

When does that start increasing or do you just leave it at four minutes because it's good enough. Thanks, so much.

Thanks, Doug on the upfront.

Yeah.

I don't know that I have seen 50% increases in CPM is off of a four.

Prior year upfront before.

The CPM is a 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 being on a us we're booking a significant we're really making progress in booking significant dollars in in the 40 high 40, even $50 and part of that has to do with the fact that our <unk>.

Share is going up we have some hit shows but there'll be male on discovery or whether it be shows like.

Like 90 day fiance, which is number one show on TV and we started to get paid a lot more money for that and so I think you will see the ctr CPM I think meaningfully better because we have a lot of headroom still to drive our CPM versus <unk>.

Competitors that are that have been at a very high level. So I think we hit this upfront at a very good moment in.

In addition, we have now some scale inventory on discovery, plus which is selling very well and in the in that environment than on go we don't have the disadvantage of.

A sustained viewers a viewer.

We don't have that inherent disadvantage versus the broadcasters. So we're getting paid on every sub and we also have a very a very good demographic, which is generating dramatically higher CPM 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 debt debt debt, we have viewing subs on discovery plus spending over three hours and net 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 on top shows from our channels are only generating about 10% per 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.

We don't have like the one we don't have.

We don't have the the one hit show with a one hit movie, but I think as a result of that we're seeing much lower churn than our peers.

And that and our and usage that is a lot more and thats 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 original US now on discovery plus when we have more coming.

And we will be doing that globally. In addition to the local content that we have outside the us Jamie maybe you could speak to the balance as we look outside the us for discovery.

Look we're continuing to obviously.

With all our great local content and we said it from the beginning our power outside the US is this combination of great local IP with.

The universe of stories that come from the U S pipeline.

And so we're continuing to lean into that we are seeing obviously a lot of that great content people and the success, we've had to date and the markets knowing that obviously since we launched and started talking about discovery plus a success over the last few months we've launched.

No really new additional markets in the markets. We already had so all of that is still to come and in the markets. We already have with the growth we've seen it's all been.

A.

The expectation of the content we are investing in.

Windowing in some cases earlier on discovery for us and.

Then getting us the second fund later on either a free to air our peanuts and in some cases, obviously some content exclusively on discovery plus and that combination.

Sure.

Content mix is working extremely well for us and is one that we're continuing to look at the data and the response of the consumer and continue to modify and adjust as necessary.

The other thing I would say David a question also about the four minutes of advertising, we obviously market the services side.

And so we we came out with a lower AD load than even what we marketed youre going to continue to stay at that level for now but.

But that actually over time, when we think its appropriate which we don't have any plans to do that for a minute.

But down the road, we obviously have some flexibility to move above the four minutes.

If we did.

And then 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 having to.

Fiddle with the consumer experience here as we've said, we're already tracking north of $10 <unk> for that for that satellite product and as you would imagine there has 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 is an underlying positive diner.

But if you just take a step back why are we so excited about this number one.

It seems to just sell commercial demo, it's a big difference between the linear TV an hour.

Additional 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 us.

And cable Cpm's that we've been discussing for them theme for us for decades here just doesn't exist. It's premium online video and we're getting full value for for our products not only that we have a highly engaged audience you heard some other stats that we mentioned that our probably top of the industry.

Very family friendly.

Family friendly content environment.

Couple that with the fact that debt.

Premium online video inventories scars in the first place because a lot of the viewership is happening on operating platform that drives super high demand and.

And hot market environment right now.

The other thing that I want to make the other point I want to make here in terms of upsides as we're still in the early innings from the perspective of our product offerings towards advertisers, but we have we have just launched our <unk> advertising product a 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 growth other ideas.

So I do think debt, we will without even.

With the number of minutes here, we will have a.

Pretty positive run rate here for <unk> over the next couple of months.

Alright, Thank you all very much.

And our next question comes from cut them mile with RBC capital markets. Your line is open.

Good morning, Thank you for taking the questions 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 DTC on your end can you refresh us on what linear.

TV pay TV subscriber trends youre 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.

On the international question in terms of pay TV universe, we're continuing to see a per on a stable to up slightly universe across the world, we have seen which we've been seeing actually for years, it's not necessarily a new trend. Unlike.

In the US we have seen more of a churn down from some of the higher end tiers, but less more of a cord shaving and a few markets investment much less of a cord cutting and so universe why does it feel like it's it continues to be fairly stable.

There are still I mean again, it's hard to talk about the international markets and a broad strokes, but.

There are select markets that youre seeing obviously more challenges, Brazil has been one where we've seen more of subscriber decline as the middle class. There has been hit harder over the last few years.

But overall the universe it remains fairly stable and the outlook for it for US continues to be that it will remain pretty stable with us.

Again, some pockets of different markets moving in different directions, but net net reasonable stability with some continued churn.

<unk> from the higher <unk>.

More broadly packaged tiers down to a slightly lower.

Price tiers in some markets.

And I think as it relates to the Disney news about the shuttering of the agent channels look I think we've obviously leaned in not to say we share.

Full portfolio of channels, but as we've talked to you before selectively in markets, where we think the long term opportunity of what is.

Possible with discovery plus in the Rps that junior and David talk to where there's an advantage there.

We've leaned into that in select markets like we've talked to you about in Denmark, and other places and we will continue to look at that as discovery plus rolls out in more markets internationally, obviously that opportunity will become more real and it's something we will evaluate on a case by case and a market by market basis, but for us the market.

Feels right now very strong for us were growing.

With our AD revenue in affiliate revenue or AD revenue is growing dramatically, but it also gives us a relationship with every distributor and what that what we're able to do is provide a value to the distributor in the bundle.

Where in many cases pay TV is only 20%, 30% penetrated and then they're super with us on discovery, plus and saying, let's reach the rest of the universe. The markets tend to look very different and so the idea of supporting us with discovery, plus and and on our traditional platform is something that.

Just has a lot of cemetery outside the us plus we have the ability to promote on our platforms.

And we have a massive library so for US right now having this generating a lot of free cash flow and scan and growth in our traditional maintaining and strengthening our existing relationships and us.

They need they don't want the channel stores to take all the business. So they are coming to us, saying discovery pluses terrific. That's good for US. It's good for you how do we help and thats, whether its the mobile players or the broadband players. So for US we think we can play in.

The advantage for us.

That's great.

Go ahead to 12 channels in each country. So the scale is bigger.

That's great. Thank you and if I could if I can for Gunnar maybe I wanted to just make maybe take a step back from the quarter and ask about the OIBDA outlook over the next few years, obviously 2020 took a hit with COVID-19 and this year, we're seeing peak DTC investments as well as Olympics weighing on profitability looking ahead, though the DTC.

Losses, EPS Olympics losses get better in 2022, and then in 2023 and of course.

Hopefully through all of this will hopefully see a recovery in linear AD trends in revenue as well of course, not expecting specific guidance, but can you just help us think through any high level puts and takes as we think about what seems like a very favorable setup.

Well I think you've just done that.

Those are those are the right building blocks and look I mean, just give me a little more color.

As I said before we have stayed away from giving you very specific guidance of breakeven etcetera.

Continue to be Super Super happy with the metrics that we're seeing for <unk>, plus and as I said a minute ago.

December we put out there this 20% margin bogey for us sort of the day plus business at scale, that's looking incredibly conservative based on what we're seeing right now I mean, let me just sort of take a step back here.

Both the <unk> numbers, which are tough.

Top of the industry churn rate and again I want to be careful here because it's so early days, but but but the cohort numbers are looking extremely compelling.

And we're doing better on <unk> than we originally modeled take those three together net just.

It leads to a customer lifetime value estimate right now in one of these specific thats still an estimate, but it's significantly better than what we what we had in mind. When we gave that number in in December at the same time, we're acquiring new subs at.

Pretty efficient subscriber acquisition costs in fact, a lot of the lost that we're looking at here for startup investments in the quarter us.

Is essentially.

The vast majority of this is just marketing driven and you would assume some efficiency as the product becomes.

Growth and awareness as we start getting more word of mouth et cetera.

And as we are benefiting from the high retention that we're seeing in our subscriber base. So.

Taking all that together again, it's just too early to start talking about.

And updated margin profile for us for 345 years out, but we feel very very good about it and so at this point about break even again as we said before it's not a metric we manage towards as long as I can we can acquire subscribers here with phenomenal lifetime value that a fraction of that.

Effective cost of debt lifetime value, we will do it and we also standby what we said earlier I don't think anyone is going to have the margins that we will have in this business and I think we're going to get there much get to breakeven or scaled margins much earlier than anyone else just because our fundamental underlying economics are not changing we're getting.

So we're getting the same value from from the consumer and we're getting the same leverage out of our content, we continue to be super efficient verticals debt.

We're a super strong in and that we have 30 years of experience and we continue to exploit our content across platforms and across the entire globe and.

It's amazing to see how this model again, it's early days, but how it's working where we're getting phenomenal cross pollination between our TV everywhere environment and discovery plus.

It's.

It's great.

We will just have to that's why I decided to give you a couple more kpis. So you can also make up your minds and think about how does that compare to what youre hearing from others.

What is what does the model look like and we'll just.

Keep giving you some some transparency and take it from there rather than giving.

Giving you a long term five year outlook for sales.

That's great. Thank you all.

Your next question comes from Alexia <unk> with Jpmorgan. Your line is open.

Alright, thank you.

Just please elaborate a little bit more on the channel of the typical consumer Andrew.

<unk> discovery class it sounds like you're skewing favorably toward the channel that advertisers are particularly excited about reaching and I'm wondering if given your outside success in the online option interest during your promotional activity in a more toward that option versus battery.

And then my second question is just really on the moderation of linear declines <unk> got such great insight into the industry and I'm curious any other.

Crystal ball, but I'm curious if you think whats really been driving it and how sustainable it is.

Thanks.

Sure. Thanks.

Thanks, Alexia, it's a lot younger more than about 15 years younger.

And.

It's also about half about half of people that have cable.

And about half of people that don't have cable and the advertisers are.

And also with the length of view, so high and the engagement so high.

We've been doing extremely well to your point, we look at AD light is kind of a breakout hit here, we are trending right now well over $10.

And as we get bigger it's continuing to grow.

And we have the strong demo. So we look at AD light is something that.

As we look at AD free versus add life, we've been talking to those customers and at four minutes an hour they seem very happy.

The AD free or very happy, but we don't really see a difference and the ability to generate significant incremental economics.

Off of the AD light, so youll see us drop pushing on AD light.

When in the AD free which was very inexpensive as we were going to be rolling it out outside the us the ability to do an add light outside the U S. J DNI.

After seeing this data.

Mediately two months ago, Wow, and so we've been pivoting because there could be upwards of 50% incremental revenue and us.

As we get the scale more than that by doing the add light and you have a very good customer experience, so which was a surprise to us we really see what people are used to commercials theyre not going to want any but it's one of the reasons, we're not going to five there so happy with before and were getting such a premium for it and it's working so well, we're just going to write it.

And let's say, maybe maybe on your on your other question.

Moderation of sub losses than linear I wouldn't I wouldn't.

I want to comment on the overall industry trend just keep in mind, our better number here is very much a discovery specific.

As a result, it's just we're getting additional carriage and some of the renewals of last year.

Helped us and we obviously continue to be among the best.

Distributed across the virtual Mvpds space. So that's been those two of them to help us.

For most of our core services for all of our core services, we have very protected carriage as well so the ability to one I don't think they would want to do anything to us, but we are very protected charge in terms of being on being on the tiers not being able to be moved around at all so you should continue to see us buy the very.

Major of our agreements be at the very top and the fact that debt.

Debt that could add our channels to tiers to drive viewership.

Which we've seen in some of our newer deals.

Yeah.

Debt, we might will probably do better.

Thank you very lax.

Your next question comes from Rich Greenfield with the right partners. Your line is open.

Yes.

Hi, Thanks for the question.

David.

Okay.

Government plus users are spending three hours per day and that would be yes.

Yes can you hear me.

Yes.

Sorry, I don't know what happened.

David I think you said before a couple of times debt time spent per discovery plus users like three hours plus per day that would be like 50% higher than Netflix and I think maybe 15 times higher than Peacock daily usage, just want to make sure is that across the meaning is that looking at 15 million subscribers and think they're averaging three hours per day.

Day or is that some subset of the $15 million and then I have a follow up on AD sales I think when you were talking about losing the release you were talking about how sort of the reach of the pay per unit universe had an impact on AD sales.

You just maybe explain whats happening in terms of is the shrinking pay TV universe, pushing more towards things like discovery plus in digital.

What exactly was the reason to that comment and how do you think that comment plays out over the coming 12 to 24 months.

Okay. Thank you rich, let me clarify that.

The three hours per day or per viewing sub.

Not per average.

And you can assume that we have about close to 50% active subscriber base on a daily basis. So thats.

That's how you need to interpret that number again I think.

You are right.

It's a great great statistic across the ecosystem.

And we're super excited about it.

The point about the universe of shrinking it's just I mean.

As I laid out we gained share by the way both domestically and internationally across across the first quarter and.

The viewing trends, though for the entire pay TV ecosystem in the first quarter jets have been tough.

We've seen.

Universe estimates declines and people using tells us that we were up significantly during the pandemic.

And we were able to produce content.

We were really able to grow share pretty pretty significantly.

We were in the world.

Some of our channels like TLC and.

And discovery and <unk>.

CTV.

They don't have the same cycle that that script. It does but we werent able to produce a lot of us.

And for those we're now back to about 90%, 95% and youll be seeing more of our fresh content coming in.

So one I think on a CAGR basis, we look different than everybody because we were up meaningfully during this period, but two we're going to have more content because it took us a little while with some of the with some other fixer uppers that we go to debt.

We had some of the impacts of the pandemic, but we're now 90, plus back and Youll see more fresh content and I think we'll continue to gain share and outperform.

And David just because as I've kind of a big picture question for you as you think about where to put content you're producing lots of it and you said you are now back to full capacity, how do you and your team decide what goes digital first to discovery plus versus what goes to the linear networks and how are you, making those decisions and is it changing.

Eddie.

But we're learning a lot we had a ton of original us and we could see what's working what kind of content.

People are watching.

We have we have it's pretty fluid.

We have higher production values, we spend that we spent a little bit more star power on discovery, plus we're trying to figure out what is the plus fixer upper we didn't ship.

Chip and Jo we Havent put anywhere except for discovery plus that was a big helper to us the BBC content will only be on discovery, plus which arent where experiment thing with we put us.

Our 90 day series on debt only went on discovery plus and it drove a lot of subscribers and a lot of viewership and then those viewers are watching our whole 90 day library with over 150 hours of original on there. So we're trying to and then at some point that we put that back on some of that content back.

That's what we're trying to figure out right now, but we've been able to feed the growth is garner said, we're seeing some steady and strong growth on discovery, plus and where we're really focused on growing.

Internationally, we're JV is taking it out and internationally, it's a little bit of a different story, because we're local and sport, but Jay do you want to talk a little bit about the international piece of debt balance Yeah, I think I think rich the other thing Thats unique David Gunnar talked about before us.

Is that the cost efficiency of our model for most of our production makes it such that we don't have as much of the either or.

Got a window here are you going to only window here and so the exclusivity that you exist in scripted which.

The price tag you can only do one or the other I think we have a very balanced and smart approach, which is we are for franchises and talent that are known to our linear brands. We continue to make sure that we're nurturing those audiences.

And selectively and particularly as David said, we're experimenting on different ways to try and see what what the data tells us we're experimenting with some early windows or pulling having a fresh talent that's been doing stuff on linear due some additional stuff for us on on day to see.

But it's we.

We can do a little bit of both of US continue to produce great originals in stores for our traditional telling us.

And give people an ability to want to access that and warrant subscribing to it.

The bigger bundles access to an a and b plus.

Either concurrently or even a bit later in some cases.

And at the same time investing some original for discovery plus that are unique and new IP, new faces new talent, New stories Edgier stories in some cases and what we could do on linear.

Traditionally.

And without breaking the bank on content budgets and so it's a really it's another strength of our unique content model that doesn't make it such an either or and we're continuing to experiment with some other windows and see what the data tells us the only point I would add is the reason I talked about in my comments about Italy is 80% of that country.

All of our content is new to them. So as you look across Europe, and Latin America.

Even though we have a very successful PE business.

We have a huge library of having been in these markets locally for 15 20 years that we can now go to an offering at a very low price and be available to 80% of the country that didn't have access to us before.

How do we window, it and how do we move it back and forth.

It's a very different question when youre going into a country that has 20 or 30% penetration and it's now new to the overwhelming majority of the population they've heard of it they've heard of it they have good feeling about it but maybe they couldnt afford to buy it or they want it at a different device, but it's a different calculation, but David is also its most extreme in some of those.

International territories, but to some extent, we see the same here domestically as we laid out we're up for the first time, we're now targeting 30 million homes that.

But don't have a cable subscription then we're getting us.

A significant number of additional viewers in here that are generating revenue at the same or better Arco and that allowed us to invest behind us and that investment over a couple of months or next year, maybe us is going to raise all boats because we're just creating more of what we're best debt, which is our our global.

We're at 100% owned.

High quality IP.

Okay.

Okay.

Our next question comes from Brandon <unk> with Keybanc. Your line is open.

Thank you for taking the question.

I was hoping you could talk more about the retention parents that youre seeing thus far for the cohort of customers are you seeing.

Pensions after the first month of greater less than 90%, maybe just some more color there would be helpful. Thank you.

Yes look.

As I said before we're very very encouraged by the retention curve, we are seeing more than 90% retention. We're starting one step earlier very very strong role to pay of north of 80%. After the seven day free trial of talking to US here and then greater than 90% of retention in the first month and then a very very significant drop off in sort of co.

Or turn up so again, it's way too early to talk about sort of a stable.

Long term churn rate here, but.

The numbers are after.

Off the charts compared with what we expected and also frankly based on the Intel that we have been able to pull together here I think there are also setting up very very nicely against the competitive offerings again, it's early days.

I always want to define that but where we could not be happier and I think it is.

It makes sense. If you look at the length of tune that we've always been seen with our viewership in many of US well, we're essentially saying the same that seeing the same behaviors here in the <unk> world.

Then then on long term churn expectations, where do you think you follow you said low single digit but is that 2% to 3% or is that more of a 4% number.

Well.

Got it.

As I said it would be speculation right now I think I think we're going to do very very well competitive with even the leading players in the industry, it's tough for us to take one month.

With two months three months and say this is where it's going to be forever.

The numbers are very good and where we are and we are in the low.

Single.

And we will see over the net.

Even if we think it's trending it's trending down if we think that gave us that may change over the next couple of months.

For the good or bad, but right now by every measure the churn is significantly lower than we expected and it's one of the reasons why we're leaning into it not just the length of view, but the very low churn and how happy people seem to be with the product.

Again, what we're looking at right now is really that.

Estimating customer lifetime value.

Up very very significantly.

Share it with what we put in our initial business case that was the foundation of what we presented in December and how that relates to subscriber acquisition costs.

Clearly if we're looking at our numbers here I have to bring out a lot of marketing spend in the first quarter and I was very very happy to do it because we're just just looking at even the revenue contributions over the balance of the year.

It's just.

Amazing return on investment by any by any measure.

Thanks for taking the questions.

I forget the last question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Thanks, Good morning, everybody.

Gunnar I was just wondering if you could talk a little bit about how you guys think about the DTC business in the context of the overall business in other words do you think about this as a single P&L because it's very tempting on our side to hear sort of the $1 billion drag on EBITDA and the path to breakeven is suggesting some pretty substantial EBITDA growth for the company over the next several years and I wonder.

If you could talk a little bit about how you think about managing the business, particularly on the content and marketing front. So so our expectations are sort of in the right place if that makes sense.

Sure.

I mean.

The question is spot on because I mean, we are south of the matter is we're looking at too.

Net revenue streams here now that has fundamentally different.

The financial profile.

So the idea would be indeed tempting to say, okay, we have a digital business and our linear business.

This is not the reality right now and maybe less so for us than for US just because we have that.

Amazing.

IP exploitation model one of the big advantages that we have is our ability to take someone bites at the apple across the global footprint and across platform. So that's why right now it is a little hard to really cleanly split out.

A digital P&L on a linear P&L and frankly, it's also not entirely in line with how we manage the company because J D and his team are very much looking at international markets in an aggregate basis and some of the trade off decisions that we've laid out are very much.

Focusing on trading of linear and digital that being said, we will we will try to make it as easy as possible for you guys to form a view.

Look by laying out.

The metrics here for our discovery plus product by giving you a perspective on on losses that we have incur.

Incurred from from launching and by giving you at.

At least the short term outlook about how we expect those lost trend line.

We're trying to help you model doesn't as I said earlier I would I would assume those startup losses to start tapering a little bit in the second quarter and then I'll also want to have the flexibility to lean in further if we find other markets are coming online that have a great opportunity to acquire subs at a multiple of their.

<unk> costs, so we'll need some wiggle room here, but what I'm trying to sort of give you.

I'll give you an understanding of.

Of that financial profile and as I said I mean.

I am focused on long term sustainable growth for the company I think that's what's going to drive shareholder value.

I mean, if you just look at if you just look at our guidance here for the second quarter accelerating U S distribution revenues from from 12% against the tough comp double digit U S AD sales growth, 50% International AD sales growth and significant acceleration in international distribution growth too.

Mid single digits I think again, it's early days.

I would say it's working.

Yes, no and we appreciate the disclosure thanks for the thanks for the answer.

Ladies and gentlemen. This concludes today's conference call you may now disconnect.

Okay.

Okay.

Sure.

Okay.

Thank you.

Non.