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 of 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 of.
And so please be advised that today's conference is being recorded I would now like to hand, the conference over to Mr. Andrew <unk> Executive Vice President of Global Investor strategy, Sir 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.
And Bell Chief Financial Officer, and JB, Perrette, President and CEO discovery networks International.
Instead of received the copy of our earnings release, but of NAS.
For the access it on the website at Www Dot corporate debt discovery Dot com.
On today's call, we will begin with some opening comments, 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 the 1995. The statements were made based on management's current knowledge.
And assumptions about future events and they involve risks and uncertainties.
<unk> actual results to differ materially from our expectations as of <unk>.
And bridges and other forward looking statements the company disclaims any intent or obligation to update them for additional information and 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 the <unk>.
That I would like to turn the call over to David.
Good morning, everyone and thank you for joining us today to review, both our Q1 performance.
And the meaningful progress we are making since our launch of discovery plus.
Across our operating segments brands and global markets and I couldnt be prouder of how our company has executed.
EMEA flawlessly.
Bonding with creativity precision and focus across the board of.
At the same time.
Accelerating the pace of innovation throughout our organization.
As we embrace substantial growth opportunities around the globe.
We continue to reposition the company and put it on the path of sustainable growth for the long term.
Our ability to generate free cash flow is crucial.
Allowing us the fully funds our pivot.
And underscoring the efficiency of our model.
Indeed, even during this moment of increased investments at.
And as clearly evidenced in our financials this quarter.
Our free cash flow machine is working harder than ever.
And it is reinforcing and evolving the narrative about discovery's differentiated hand.
With the strong global launch of discovery, plus we are now scaling of very well received global direct to consumer offering the <unk>.
Complement our incumbent linear channel presence and every TV market around the globe.
And Q1 discovery had the most watched domestic pay TV portfolio.
Internationally, we enjoyed and impressive seventh consecutive quarter of linear share growth anchored by our 27th straight month of growth and our female genre 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 kind of.
We achieved this while simultaneously launching and building discovery plus.
Our continued strategic focus leverages discoveries powerful competitive advantages.
Well established consumer connections and every market and the world.
The vast local language IP ownership.
Deep and expanding distribution relationships.
Super efficient content production.
The power of both our global direct to consumer expansion and our core linear business.
To achieve this we are investing more than ever before and our content across the board to support these platforms.
So far and 2021 it is all coal assets.
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.
And with the vast majority of our international expansion still ahead of us.
We have 15 million total paying subs across our global direct to consumer base.
And we continue to move forward with strong momentum.
And I think about our $15 million in rest of the historic subscribers of the cash today.
And the fact that we were able to add 10 million paying subscribers since the <unk>.
And of last year.
And really impressive traction.
At the end of Q1, we cross 13 million paying global next.
<unk>, representing sub growth the compares quite favorably to our peers over the same period underscoring the value of appeal and stickiness of our content.
All of which supported our conviction about 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 RP and particularly in the U S.
Which likely place us at the very top of an impressive list of peer offerings.
Many of whom of at a far longer runway. Thus far then.
Relative to pay has been between 80 and 85% of free trial subs.
Engagement is approximately three hours per day per viewing subscribers.
And well ahead of linear.
The retention is strong.
Giving us confidence debt, while early monthly churn is trending towards low single digits.
Consumers clearly love the discovery plus product.
We see that our social and the App store product ratings and the feedback from partners clients and talent in the marketplace.
Our App store ratings ranked among the sector's top.
Apple App store rating.
It's four nine.
And based on a very large number of reviews.
Our strong early kpis of 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 and 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.
And I'll provide some additional detail on metrics and Kpis.
But in short we are working towards a subsidy.
Customer lifetime value, particularly as contrast that against the cost the gain of subscriber.
The 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 opportunity. We have an extremely focused approach and all the ways. We can be available to the broader swath of users while driving of rich and.
Amit user experience.
A cornerstone of this will be expanding our partnerships with many of the world's leading distributors and platforms.
We recently launched the Comcast Xfinity flex and soon on ex one.
And our deepening our relationship with Amazon and around the globe with availability on Prime video channels, and the United States and the global rollout plan for other PVC market.
Now, let's look at Italy is 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.
<unk> local talent sticky original content management resources and relationships production and technology infrastructure and.
Popular brand and channel presence.
Like a number of other markets in Europe.
Italy is relatively underpenetrated with respect to pay TV.
The 20% was really one main distributor.
It is significant and mobile penetration and usage.
And with discovery enjoys a healthy pay and free to air presence with debt the local in language content.
And though we have grown our audience share of the existing pay TV market structure limits the upside from this segment of vehicles.
The launch of discovery plus.
As 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 and entry cost for premium video that 75% plus more affordable than traditional bundles and.
And discovery plus <unk> are already more than three times, greater and our wholesale portfolio.
This is the powerful combination of potential universe and price growth.
What we are seeing and Italy, the ISR thinking on the prospects of what 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 of direct to consumer offerings.
<unk> with mobile or multi platform operators should ultimately result, and new customers higher rpms and a deeper direct connection with our.
Of equal importance of the balance we have been able to strike across of linear and direct between the businesses.
Collecting on our Q1 performance, which by many measures is still face and 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.
Good and we will take you through the details, but I'm pleased to note that and every international region seeing positive advertising growth for 2020.
For the record shares in Q1, but major markets like U K, France and Germany.
We are seeing the great resilience and our advertising business not just internationally, but also domestically.
This taken together with very strong scatter pricing and the U S.
And public spending across the globe.
Give us confidence and our advertising outlook for the balance of the year, especially with the growing discovery plus opportunities.
We couldnt be more excited to present to our advertisers at this year's upfront on May 18 at.
And at a time, when our brand and programming have 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 of healthy inflection and 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.
The exceeding our expectations.
Got it.
And are effectively managing through and dynamic fluid and exciting of time as I have ever seen and my many years and the media business.
We are encouraged by the engagement and reception to the 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 of success is to the future prospects of the company.
Of the equivalent of importance is our core linear business the.
The foundation of the company.
And backbone of our strong free cash flow.
As we drive and Jim.
Long term sustainable growth.
It is imperative that we nurture both sides of the company and interconnected and supportive to one another.
Thank you and I'd like to turn the call over to Gunnar.
After which JV gruner and I will take your questions. Thanks, so much.
Thank you David and good morning, everyone.
My aim this morning, and should provide a slightly more detailed peek into the operating model as well as of our near term outlook. The move of normally do and large part given the recent volatile.
To the extent that this has created additional questions and are concerned my goal will be to help alleviate as much of that as possible. This morning.
2021 is off to a great start.
David just mentioned and which I will provide a little more context of oil.
And kpis, particularly in the U S, where we launched at the beginning of this year, the cross engagement monetization and churn and implied customer lifetime value continue to reinforce our belief that prioritizing investment and discovery plus will generate superior returns and capital.
As noted engagement of 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 of indeed, looking very encouraging with churn coming in quite a bit lower than we had initially anticipated.
And while it is still too early to evaluate of 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 for discovery and the U S is already in line with our $7 of linear tech buoyed by the strong monetization of the add life product for Arco has already exceeded $10 and the first of all.
Clearly strong engagement and watch time, despite offering on the four minute of AD load and lending themselves to healthy advertiser demand and the term exceptionals.
Still early days, but we see of notable path for further monetization as we continue to scale and drive additional engagement attract additional advertisers and brands and rollout new advertising products.
Global <unk> and over $5, a day with international and <unk> as expected the load out of the U S. This is in part due to the market price points and in part because we are launching the greater share of all the subscribers coming through most of the partnerships, which drive faster adoption and market and efficiency, but also come out and initially no Ark.
And.
That being said, we are and virtually all cases are sort of multiples above the existing wholesale linear ATP and <unk>.
We currently monetize it.
This of course of the core tenant of our international discovery plus strategy and the brake objective Testament to the quality and value of our content and the marketplace not limited by the boundaries of the traditional pay TV ecosystem.
Taking the metrics together, we are modeling and much more substance of estimate of customer lifetime value. While subscriber acquisition cost is currently running at the 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 and we believe the meaningful upside to the target based on all of these initial indicators trending above our business case.
During the first quarter next generation revenue has increased 52% year over year, and we look to build upon this momentum and Q2 with next generation revenue set to more than double digits, driven by both volume of subs and monetization.
We did invest heavily and marketing spend and the first quarter to support the U S launch of discovery bust and rebranding the play and key international markets.
The sizable portion of which was dedicated to upper funnel brand marketing and build awareness as well as bottom up the final performance margin.
This accounted for the vast majority of the.
So the losses were roughly $400 million and the first quarter.
We expect the modest sequential improvement of Nextgen losses in Q2 of continued substantial marketing efforts the rollout of additional territory and rest of the content and tech spend will begin to be offset by more material revenue contributions also we expect to better optimize the refined marketing some of the gain additional insights quarter to quarter losses and quite possibly.
And what ultimately falls into 2021 versus 2020 two is still subject to a number of moving pieces.
And we will obviously provide as much transparency as possible ahead of such movements, particularly as impacted by rollout plans one of the Olympic games planned technology spend and platform integrations as determined by specific car.
That said, we continue to remain confident the 2021 will represent the peak year for us from our investment initiatives.
Of course, we are mindful of ever about the magnitude of these expenses the impact on our financials, yet and we are.
The short by the compelling return metrics against this debt.
Now turning to the segments and the U S advertising finished down 4% during the first quarter and large part future of universe estimates and put level the cost.
Which ultimately translated into lower impressions across the industry and our networks.
That said, we continue to outperform our pace of the network peers on share during the quarter. Moreover, pricing remained robust scatter CPM to develop and strongly during Q1 and expect to be up about 30% year over year with roughly 50% premium versus upfront in Q2.
And in fact total dollar volume for Q2, and scatter will be up considerably and stuff.
Here as we see categories, such as auto and travel coming back and was from the influx of DTC companies, including many new TVN.
Discovery plus had started.
Advertising revenue in Q1 and subscribers grew throughout the quarter and we expect and the increasing tailwind from this component through Q2 of <unk>.
We expect U S advertising revenue to grow and the low double digit range and future helped in part by COVID-19 Coms strong pricing and advertiser demand across the basin.
U S distribution revenues were up 12% during the quarter.
At the high end of our expectations mid single digit linear distribution revenue growth continued to be supported by contractual affiliate fee increases partially offset by pay TV subscriber declines.
Subscribers through all of fully distributed of linear networks declined by 2%, while our total <unk> subscribers declined by 4% likely top of peer performance helped by additional network characterization affiliate renewals and continuing share gains the virtual mvpds.
And where we remain very well can best across all key platforms.
In addition to our healthy traditional zone.
And it's the launch of discovery plus and the subsequent ramp up of subscribers accounted for much of the sequential acceleration of the distribution revenue.
During the Q2, we expect reported distribution revenue growth will accelerate FERC, even against the much tougher comparison, given the significant onetime benefit recognized last year.
Implying a significant acceleration on an underlying basis supported by similar drivers and in Q1.
Turning to international networks, which I will discuss is always on a constant currency basis advertising grew 8% during the first quarter as all of international regions, EMEA, and 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 the intermittent lockdown and certain EMEA markets. We saw mid single digit growth across the regions with the continuing share gains in key markets like the UK, Spain and France.
And finally APAC was also up significantly during the quarter.
And Q2 of Recomfort substantial declines faced by the advertiser of industry last year. During the initial stages of the COVID-19 pandemic, we expect international advertising revenue growth to exceed 50%.
The international distribution revenue was down 2% and Q1 due to lower linear pricing in certain European markets, partially offset by our ongoing discovery of subscriber base.
We expect international distribution revenue to accelerate to mid single digit growth during the second quarter driven by the same factors.
And we called out in prior quarters, and we repositioned and number of key and the national distribution partnerships towards a hybrid type structure with optical trade nearer term upside on the linear portfolio per greater.
<unk> support for all of <unk> efforts.
Segment performance have already reflected some of the impact of this.
Last few quarters.
Turning to the expense side.
Total operating expenses for the consolidated company were up 21% during the quarter.
Cost of revenues were up 2% largely due to the the continued brand and company investment support of our next generation of initiatives and the timing of sports company in Europe, partially offset by more efficient conference both of them.
SG&A increased 48% per reflect marketing and branding as well as personnel and technology spend to support our next generation of initiatives.
As we guided previously we continue to target of low to mid single digit percentage reduction non core businesses.
Turning to free cash flow, we produced Q1 free cash flow of the $179 million for the nature of that ought to free cash flow conversion rate similar to the prior year quarter U.
We remain confident and reassured and our ability of the financial support all of our strategic endeavors, and we continue to convert the EBITDA at a highly efficient day, despite the initial and significant ramp and our investments.
We did not buyback any shares during the quarter as I noted earlier, we continue to review and restaurants and discovery plus the best fundamental of 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 the cadence of our global discovery plus rollout of the main Stewart, 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 the rigorous financial framework bear in mind that we're gearing up for two sets of Williams of games. This summer and in Q1 next year, both of which will be tentpole events for the marketing of our <unk> and linear brands.
We will of course continue to update you on our views on capital allocation as a percentage.
This quarter.
Quarter of approximately three five times net leverage and needless to say remain fully committed to our investment grade debt.
Turning to a couple of housekeeping items number one and you may have noticed we are no longer disclosing adjusted EPS available and free cash flow continued to be the key financial metrics and the value add and our operating performance.
And will however, provide you with the PPA impact each quarter as well as point out chemo or the items to help calculated and adjusted EPS number to the extent helpful.
For the first quarter of PPA was <unk> 32 per share.
Number two we expect FX to have roughly of positive $40 million year over year.
Revenues and around the negative $25 million year over year impact the entire Buda and 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 and many of them.
And our ability to convert <unk> of a free cash flow, where I continue to see at least 50% of this year has never been more valuable given the investment.
We have the self funded business aimed at supporting and immense global direct to consumer opportunities.
We couldnt be more excited as the management team to focus of 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.
And ladies and gentlemen classic of question. Please.
And the number one and your telephone keypad, well pause for just a moment how the Q&A roster.
The first question comes from Robert Fishman with marketing and confirmed your line is open.
Full year core U S affiliate fee growth after excluding nexgen revenues for the.
The full year and then more broadly have you seen any pushback.
For launching discovery bus and domestic affiliate fee negotiations and maybe if you can talk to whether the launch of discovery plus on Xfinity should be viewed as incremental or cannibalistic to your overall partnership of Comcast. Thank you.
Okay. So.
And good morning, and let me let me take let me start with that last question.
The we're super excited about the upcoming launches here as you have seen in our numbers and 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 the middle but the the Comcast launch is going to be one very positive event.
And to answering your question I do think there is of significant incremental impact that's what we've seen with other deals coming online.
After the launch so.
And that should be of positive and we also look at other events happening internationally over the next couple of months that are at the start.
Further support the subscriber growth here, most importantly, obviously as the Olympics coming and internationally and so that's that.
For the for the subscriber.
A trend here.
Other question on on the <unk>.
The U S affiliate side again as I as I, just laid out we're super happy with.
And what we're seeing for distribution across the entire.
The ecosystem here clearly seeing the very healthy and accelerating.
And the contributions from discovery, plus and our DTC efforts overall, but we're also looking at a very healthy underlying trend and the core business you saw the the <unk>.
Many of our 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 and our.
And for our core networks and.
And as I said, we've continued to enjoy a roughly mid single digit growth here and the linear part of the ecosystem.
The.
And your question about the renewals and and impact of discovery plus look.
As I said, we are continuing to get fee increases that's one of the reasons, we have been able to continue the growth that we have delivered.
And the fourth quarter now and the first quarter and we have been the.
We're seeing very positive.
The discussions for the past renewals and for upcoming.
The upcoming renewals as well as you have heard clearly discovery pluses and argument and those discussions, but it's one of many and to me. It comes back to just the rational.
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 the investments. This company of investing as much and 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 and.
And.
And we feel that way and the.
And the very good position.
And the only thing I would add to that is the outside the U S. We've been doing.
The partnership arrangements, whether it be Vodafone of Sky, we're seen as a real positive.
And the fact that Comcast Brian is of great operator.
The launched us on flex, we're now going to be launching an ex one.
So we really effectively we have two sides of of terrific partnership they're getting value and.
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.
Create value for us and for them by and.
They have some.
And they have some real entitlement, there of broadband leader and and.
These channel stores have really developed and and Comcast is looking and between flex and ex one it could be of real generator of value for both of us and as Gunnar said.
The share of our traditional channels are going up.
They are selling those channels the cost of those channels of very low and we're <unk>.
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 the full year.
The growth outlook here for for all of the known reasons, but.
And 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% and Q1 and I expect an acceleration off of this number and I'm not getting more specific here because to some extent the theres going to depend on the cadence of the subscriber additions on the BDC side, because as I said thats flowing through.
And now very significantly on the revenue side, but if you keep in mind last year and 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 and underlying basis.
Maybe just maybe and underlying high single digit growth quarter.
Which is going to come through as a.
And so sorry of 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 kind of your line is open.
Thanks, so much kind of hard to fill of the questions here I think Dave and David first for you.
How are you balancing content.
ROE versus the discovery Cross how are you and and versus the linear networks and.
And any change and content strategy from what you've seen so far in terms of what people are consuming it on discovery costs I think that sort of number one I think number two.
Upfront looks like up 50% to 20% per CPM.
Of a 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 and if I could tag on a quick one AD load of four minutes.
When does that start increasing or do you just leave it at four of them and that's because it's good enough. Thanks so much.
Thanks, Doug on the upfront.
And I don't know that Ive seen and 50% increases in and CPM is off of a of of <unk>.
Prior year upfront before.
The the the CPM is of 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 of that and now all of a sudden instead of being kind of as.
We're booking of Signet, we're really making progress and booking significant dollars in and the 40 high 40, even $50 and part of that has to do with the fact that our share is going up we have some hit shows whether it be male on the discovery or whether it be shows like.
The 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.
Competitors that are that have been that of very high level. So I think we hit this upfront at a very good moment and.
In addition, we have now some scale inventory on the discovery, plus which is selling very well and in the in that environment and on go we don't have the disadvantage of.
A subsidiary of viewers of 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 very good.
<unk> graphic which is generating dramatically higher CPM and we're seeing and traditional so overall I think the advertising market very very strong upfront and coming up feeling good about it in terms of balancing.
The idea that the debt.
We have viewing subs on the 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 of original shows and the top shows from our channels are only generating about 10% of the viewership. We have a very long tail library of about the size of Netflix and people are spending a lot of time with it and a lot of time.
So we don't have like the one that we don't have.
And we don't have the the the one hit show of the 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 debt is a lot more and thats generating.
Real economics for us on the advertising side, which has surprised us the kind of economics and that we're getting we will continue to experiment with how we move IP around.
We have a lot of original is now on discovery, plus and we have more coming.
And we will be doing that globally, and addition to the local content that we have outside the U S. JV, maybe you could speak to the balance as we look outside the U S per discovery.
Look we're continuing to obviously.
With all of our great local content and instead of from the beginning of our power outside the U S is this combination of great local IP with the kind of with.
The universe of stories that come from the U S pipeline and.
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 the startup costs of success over the last few months we've launched.
With the new additional markets and the markets. We already had so all of that is still to come and and the markets. We already have with the growth we've seen it's all been.
A.
And the exploitation of the content we are investing in.
Windowing and some cases earlier on discovery plus and.
And then getting of sort of second fund later on either of free to air our peanuts and in some cases of obviously some content exclusively on discovery plus and that combination.
Of the.
Of 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 only.
The other thing I would say day to the question also about the four minutes of advertising, we obviously market the services five.
And so we came out with the lower AD loads and even what we marketed we're 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 to the minute.
But down the road, we obviously have some flexibility to move above the four minutes.
And if we needed and.
And then Doug and maybe if I can just add to that it's an upside but right now the trends are so overwhelmingly positive I mean, we have so much opportunity without having to.
Fiddle with the consumer experience here as we said, we're already tracking north of $10 <unk> for that for that headlight of 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 products. So there is and underlying positive diner.
But if you just take a step back here of what why are we so excited about this number one.
It seems to just sell of commercial demo, it's the big difference between the linear TV and our.
The digital platform here, we're selling every single eyeball on discovery and TV everywhere for that matter and number two is we've got a really level playing field here the big gap between block.
And cable Cpm's that we've been discussing four of them seem for free.
Decades here just doesn't exist, it's premium online video and we're getting full value for our products not only that we have a highly engaged audience you heard some of the stats that we mentioned that our probably top of the industry.
Very family friendly.
The family friendly content environment.
Couple of that with the fact that debt.
The premium online video inventory of scars and the first place because a lot of the viewership is happening on AD free platforms that drives the super high demand and and.
And the hot market environment right now.
The other thing that I want to make and the other point I want to make here in terms of upsides and we're still and the early innings from the perspective of our product offerings towards advertisers, but we have we have just launched our of binge of advertising products of pause ads, we're working on more and it's and the way it's.
Part of the prioritization exercise of year to get all of those features online.
But there are a couple of great other ideas.
So I do think debt, we will without even.
And with the number of minutes here, we will have a.
Pretty positive run rate here for <unk> over the next couple of months of them.
Alright, Thank you all very much.
And our next question comes from cut them the 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 and your and can you refresh us on what linear.
TV pay TV subscriber trends youre seeing across your larger international markets and ultimately your comfort level and 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 current of stable to up slightly universe across the world, we have seen which we've been seeing actually for years. It is not necessarily of new trend the unlike.
And in the U S. We have seen more of a churn down from some of the higher and tiers, but less and more of a cord shaving and a few markets and less much less of of cord cutting and so universe why does it feel like it's the continue 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 of the middle class. There has been hit harder over the last few years.
But overall the universe and it remains fairly stable and the outlook for it for US continues to be that it will remain pretty stable with.
Again, some pockets of different markets moving in different directions, but net net reasonable stability with some continued churn.
And from the higher <unk>.
More broadly packaged tiers down to a slightly lower.
Price tiers and some markets.
And I think as it relates to the the Disney news about the shuttering of of the agent channels look I think we've obviously leaned in and not to say we have.
The 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 and the Rps that dinner and David talk through where there's an advantage there.
And we've leaned into that and select markets like we've talked to you about and 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.
And with our AD revenue and affiliate revenue and revenue is growing dramatically, but it also gives us the relationship with every distributor and what the what we're able to do is provide a value to the distributor and the bundle.
And where in many cases pay TV is only 20%, 30% penetrated and then they're super with us on the discovery, plus and saying, let's reach the rest of the universe of 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 U S 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 and and growth in our traditional maintaining and strengthening our existing relationships and.
It's the.
They need they don't want the channel stores to take all of the business. So they are coming to us and 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.
And advantage for us.
And that's great.
Go ahead of the 12 channels in each country. So the scale is bigger.
That's great. Thank you and if I could if I can for Gunnar and 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 and Olympics weighing on profitability looking ahead, though the DTC.
Losses, EPS Olympics losses get better and 2022, and then in 2023 and of course.
And hopefully through all of this will hopefully you feel of recovery and linear AD trends and revenue as well of course, not expecting specific guidance, but can you just help us think through any high level of puts and takes as we think about what seems like a very favorable setup.
Well I think you've just done that.
Those are of those are the right building blocks and look I mean, just give me a little more color.
And as I said before we have stayed away from giving you very specific guidance of breakeven etcetera I continue to be Super Super happy with the metrics that we're seeing for for the plus and as I said a minute ago and.
December we put out there this 20% margin bogey for us and of the day plus business at scale. That's looking incredibly conservative based on what we're seeing right now and let me just sort of take a step back here.
Both of the pay numbers, which at the.
Top of the industry churn rate and again I want to be careful here because it's so early days, but the 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 and one of the specific to fill and estimate but it's significantly better than what we what we had in mind. When we gave that number and in December at the same time, we're acquiring the subs at.
Pretty efficient subscriber acquisition cost impact of lot of the loss that we're looking at here for startup investments and the quarter is essentially in the pool.
The majority of this is just marketing driven and you would assume some efficiency as the the.
The product becomes.
And the awareness as we start getting more word of mouth et cetera and.
And as we are benefiting from the from the high retention that we're seeing and the subscriber base. So.
Taking all of that together again, it's just too early to start talking about sort of the.
And updated margin profile 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 can acquire subscribers here with the nominal lifetime value of that a fraction of debt.
The effect of cost of the 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 and 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 of our fundamental underlying economics are not changing we're getting 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 and super efficient verticals that debt.
And we're super strong in and.
We have 30 years of experience and and we continue to exploit our content across platforms and across the entire globe and.
It's amazing to see how this model and again, it's early days, but how it's working.
We're getting phenomenal cross pollination between our TV everywhere environment and discovery plus.
It's the.
It's great and then.
And we will just have to that's why I decided to give you a couple of more kpis. So you can also of makeup of your mines and think about and 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 the gift.
Giving you a long term five year outlook.
That's great. Thank you all.
Your next question comes from Alexia <unk> with Jpmorgan. Your line is open.
Alright, Thank you and.
Can you please elaborate a little bit more on the the demo of the typical consumer and.
And your discovery price it sounds like the skewing favorably toward the download of advertiser and particularly excited about the chain and I'm wondering if given your outside of <unk> SaaS and the AD might option interest during the promotional activity in a more toward that option versus the AD free.
And then my second question and just Mary and Alan on the moderation of linear that the client of <unk>, you've got such great insight into the industry and I am carrier Christopher.
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 and more than about 15 years younger.
And the.
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 the 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 <unk>.
As we get bigger and it's continuing to grow.
And we have the strong demo so we look at AD light of something that.
As we look at AD free versus AD light, we've been talking to those customers and had four minutes and hour they seem very happy.
The AD free of very happy, but we don't really see of difference and the ability to generate significant incremental economics.
Both of the AD like so you'll see us pushing on add light and and when.
And the AD free which was very inexpensive as we were going to be rolling it out outside the U S. The ability to do and add light outside the U S. J DNI.
At the same this data.
Immediately two months ago, Wow, and so we've been pivoting because.
There could be upwards of 50% incremental revenue and.
And as we get the scale of more than that by doing the add light and you have the very good customer experience, so which was the surprise to us we really see what people are used the commercials and not going to want any but it's one of the reasons, we're not going to five there. So happy with the four and were getting such a premium for it and it's working so well with just kind of ride it.
And let's say maybe maybe on your on your other question the moderation of sub losses, and linear I wouldn't I wouldn't.
And I want to comment on the overall industry trend just keep in mind, our better number here is very much a discovery specific.
It's just we're getting additional carriage and some of the renewals of last year and Thats helped us and we obviously continue the among the best.
Distributed across the virtual Mvpds space. So that's been the those two up and the help of that and when.
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 and not being able to be moved around at all so you should continue to see us buy the very may.
Each of our agreements be at the very top and the fact that the debt that could add our channels the tiers to drive.
Viewership.
Which we've seen and some of our newer deals.
Yeah.
Debt, we might will probably do better.
Thank you very lax.
Your next question comes from.
And rich Greenfield with the right partners. Your line is open.
Hi, Thanks for taking the question.
David.
And our government.
Plus users are spending three hours per day and that would be net.
Yes can you hear me.
Yes, we can.
Sorry, I don't know what happened so 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 of is that across the mean.
Looking at 15 million subscribers, and saying theyre, averaging three hours per 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 leasing and the release you were talking about how sort of the reach of the pay per unit universe had an impact on AD sales could you just maybe explain what.
Happening in terms of is the shrinking pay TV universe, pushing more towards things like discovery plus and digital.
What exactly was the reason of 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.
And the three hours per day or per viewing sub.
And not per average.
And you can assume that we have about close to 50% active subscriber base on a daily basis. So that's that's how you need to interpret that number again I think.
All right.
So it's a great great statistic across the ecosystem.
And we're super excited about it.
The the pointed out the universe of shrinking it's just I mean.
And as I laid out we gained share.
The way, both domestically and internationally across the across the first quarter and.
The the viewing trends, though for the entire pay TV ecosystem and the first quarters have been tough I mean, we've seen.
Universe estimates declines and people using til. The thing is that we were up significantly during the pandemic and.
And we were able to produce content and.
We were really able to grow share pretty pretty significantly.
We were and the world.
Some of our channels like TLC and.
And discovery and.
And <unk> TV.
And they don't have the same cycle that that script. It does but we werent able to produce a lot of potential.
And for those we're now back to about 90%, 95% and youll be seeing more of our fresh content coming in.
And so one I think on a CAGR basis, we look different and 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 of the fixer uppers that we go to <unk>.
We wish we were 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 of 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 the team decide what goes digital first the discovery plus versus what goes to the linear networks and how are you, making those decisions and is it changing.
Ready.
But we're learning a lot we had a ton of original <unk> and we could see what's working what kind of content.
People are watching.
We have we have.
Fluid.
We have higher production values, we spend that we've spent a little bit more star power out of discovery plus we're trying to figure out what is the plus fixer upper we didn't and.
Chip and Jo we Havent put anywhere except for discovery plus that was the big helper to us for the <unk>.
BBC content will only be on discovery, plus well try and we're experimenting with we put.
The 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 as Gunnar said, we're seeing some steady and strong growth on the discovery, plus and where we're really focused on growing and in.
Internationally, we're JV is taking it out and the internationally, it's a little bit of a different story, because we're local and sport, but Gabe you wanted to talk a little bit about the international piece of that balance, yes, I think I think rich the other thing thats unique and as David and <unk> talked about before.
Is the 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 of here are you going to only one note here and so the exclusivity that you exist and 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 of audiences.
And selectively and particularly as David said, we're experimenting and different ways to try and see what what the data tells us we're experimenting with some early windows or of pulling having the talent that's been doing stuff on linear due some additional stuff for us on on day to see.
But it's.
We can do a little bit of both of US continue to produce great originals and stories for our traditional telco and.
And give people the ability to want to access that and warrant subscribing to it and the bigger bundles and access to an a and b plus.
Either concurrently or even a bit later and some cases.
And at the same time invest and some original for discovery plus that are unique and new IP, new faces new talent, New stories, Edgier stories, and 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 of the windows and see what the data tells us the only point I would add is the reason I talked about and my comments about Italy is 80% of that country.
And all of our content is new to them. So as you look across Europe and Latin America.
Even though we have a very successful pay and business.
We have a huge library of having been in these markets locally for 15 20 years that we can now go to and offering at a very low price and be available to 80% of the country that didn't have access to us before.
Here of how do we window it and how do we move it back and forth is a very different question when youre going into a country of Theres 20, or 30% penetration and it is now new to the overwhelming majority of the population and 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 wanted out of different device, but it is a different.
But David is also its most extreme and 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.
And that don't have of cable subscription and we're getting.
Inefficient number of additional viewers and here that are generating revenue at the same or better Arco and that allowed us to invest behind this and that investment over a couple of months or next year. Maybe is the is going to raise all boats because we're just creating more of what we're best debt, which is our our global unencumbered Hunter.
The percent owned.
And the high quality IP.
Okay.
Okay and.
Our next question comes from Brandon <unk> from Keybanc. Your line is open.
Yes, Thank you for taking the question.
I was hoping you could talk more about the retention parents that you've seen thus far for the cohort of customers are you seeing retentions. After the first month of greater less and 90% maybe just some of our 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% of retention and we're starting one step earlier very very strong role to pay of north of 80%.
After the seven day free trial of talking U S. Here, and then greater than 90% of retention in the in the first month, and then a very very significant drop off and sort of cohort churn out.
And again, it's way too early to talk about sort of a stable.
Long term churn rate here, but the.
The numbers are.
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 they're also stacking up very very nicely against the competitive offerings again, it's early days.
And I always want to display and that we could not be happier and I think it makes sense. If you look at the length of tune that we've always been seeing with our viewership and many of the as well, we're essentially saying the same seeing the same behaviors here in the and the BDC World.
And then on long term churn expectations, where do you think of Paul you said low single digit but is that 2% to 3% or is that more of a 4% number.
Well.
Let's.
And as I said it would be speculation right now I think I think we're going to do very very well compared with with even the leading players and the industry and it's tough for us to take one month.
With two months of three months and say this is where it's going to be forever.
And the numbers of very good and where we are and we are in the low.
The single.
And we will see over the net.
And even if we think it's trending it's trending down if we think that that may change over the next couple of months.
The go to the bad but right now the by every measure of the churn of 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 and.
Again, what we're looking at right now is really that.
Estimating customer lifetime value.
And im very very significantly.
And with what we put an hour and initial business case that was the foundation of what we presented and in December and how that relates to the subscriber acquisition cost and.
And clearly if we're looking at and our numbers here I have to bring out a lot of marketing spend and 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 and.
Amazing return on investment by any by any measure.
Thanks for taking the questions.
And I forget the last question comes from Ben Swinburne with Morgan Stanley. Your line is open.
Thanks, Good morning, everybody.
Good and I was wondering if you could talk a little bit about how you guys think about the DTC business and the context of the overall business in other words do you think about this is the single P&L because it's very tempting on our side to hear sort of of the $1 billion drag on EBITDA and the path to breakeven of suggesting some pretty substantial EBITDA growth for the company over the next several years and I wonder.
And if you could talk a little bit of of how you think about managing the business, particularly on the content and marketing front. So so our expectations are sort of and the right place if that makes sense.
Sure.
I mean the.
The question was spot on and then because I mean, we are south of the matter is we're looking at too.
Net revenue streams here now that have 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 others, just because we have that.
Amazing.
The IP exploitation model one of the big advantages that we have is our ability to take so many bites at the Apple across the global footprint and the cross platform. So that's why right now it is a little hard to really cleanly split out.
A digital P&L on the linear P&L and frankly, it's also not entirely in line with how we manage the company because J D and his team of very much looking at international markets and an aggregate basis and some of the trade off decisions that we've laid out are very much.
Focusing on trading of the linear and digital and that being said, we will we will try to make it as easy as possible for you guys to form a view and.
Look the laying out.
The metrics here for our discovery plus product by giving you a perspective on on losses that we have incurred.
Incurred from from launching and by giving you at.
At least the short term outlook about how we expect those loss to be trending.
And we're trying to help you model doesn't as I said earlier I would I would assume all of those startup losses to sort of tapering a little bit and the second quarter again I also want to have the flexibility to lean and further if we find out of the markets are coming online that have a great opportunity to acquire a subset of multiple of the.
<unk> costs, so we'll need some wiggle room here, but what I'm trying to sort of give you.
And give you an understanding of the.
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.
And 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 comps and double digit U S AD sales growth of 50% International AD sales growth and significant acceleration and 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 and thanks for the thanks for the answer.
Okay.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
And.
Yes.
And.
Yes.
Okay.
Non.
Thanks.