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 that today's.
The conference is being recorded I would now like to hand, the conference over to Mr. Andrew Sleep and executive Vice President 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.
Leading belt, Chief Financial Officer, and JB, Perrette, President and CEO of Discovery networks International you should have received a copy of our earnings release, but if not for 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 would like to remind you that comments today regarding the company's future business plans and prospects and financial performance are forward looking statements that we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act and 1995 and statements for made based on management's current knowledge.
And assumptions for future events, and they involve risks and uncertainties.
Cause actual results to differ materially from our expectations.
Slide and bridge and other forward looking statements the company disclaims any intent or obligation to update them for additional information on important factors that could affect these expectations. Please see our form 10-K for the year ended December 31, 2020, and our subsequent filings made with the U S Securities and Exchange Commission and with that I'd like to turn the call over to David.
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 discovery for us.
Across our operating segments brand and global markets I Couldnt be prouder of how our company has executed.
Near flawlessly.
Bonding with creativity precision and focus across the board.
At the same time, Inc.
Celebrating 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 underscoring the efficiency of our model.
Indeed, even during this moment of increased investment and it's.
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 narrative about discovery's differentiate attained.
With the strong global launch of discovery, plus we announced scaling very well received global direct to consumer offering.
Complements our incumbent linear channel and every TV market around the globe and.
For 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 months of growth and 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.
Well established consumer connections and every market and the world.
Vast local language IP ownership.
Deep and expanding distribution relationships.
Super efficient content production.
To power, 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 call us.
And exceeding all of our early benchmarks across almost every kpis.
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.
When I think about our $15 million left and historic paying subscribers that we have today.
And the fact that we were able to add 10 million paying subscribers since the end of last year.
And really impressive traction.
At the end of Q1, we cross 13 million paying global next.
<unk>.
Presenting sub growth that compares quite favorably to our peers over the same period underscoring the value appeal and stickiness of our content.
And 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.
Particularly in the U S.
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 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.
For 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 and the App store product ratings and.
Feedback from partners clients and talent in the marketplace.
Our App store ratings ranked among the sector's top.
And our Apple App store ratings.
As for <unk> nine.
And based on a very large number of reviews.
Our strong early kpis, but driving exceptional modernization.
Our $4 99, and light product with only four minutes of commercial time generated over $10 of RP and the quarter.
Already well ahead of our longer term goal.
And it's still trending up.
Our overall blended U S. Our pool 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 this year.
And on a global blended basis, we are seeing our pool 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, it against the cost to gain a subscriber.
Encouraging us to lean in from an investment standpoint, when it comes to marketing.
<unk> and technological capability in order to maximize this meaningful growth opportunities. We have an extremely focused approach and all the ways. We can be available for the broader swath of users, while driving a rich and dynamic user experience.
A cornerstone of this will be expanding our partnerships with many of the world's leading distributors and platforms and <unk>.
Recently launched for Comcast Xfinity Flex and <unk>.
And on X one.
And our deepening our relationship with Amazon around the globe with availability on Prime video channels, and the United States and a global rollout plan for other PVC markets.
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 strong 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.
20% was really one main distributor.
It has significant mobile penetration and usage and <unk>.
And with discovery enjoys a healthy pay and free to air presence with debt and local in language content.
And now we have grown our Audi and share the existing pay TV market structure limits the upside from this segment of vehicles.
The launch for discovery plus and.
And has catalyzed a new growth trajectory, our addressable market has grown more than 10 thoughts from pay TV to now include mobile and broadband.
Discovery, plus enables and entry costs for premium video that 75% plus more affordable than traditional bundles and <unk>.
<unk> plus <unk> are already more than three times, greater and our wholesale portfolio.
This is a powerful combination of potential universe and price growth.
What we are seeing and Italy, the ISR thinking on the prospects for 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.
And with mobile or multi platform operators should ultimately result, and new customers higher rpms and a deeper direct connection with our.
Of equal importance for 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 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 and our Q2 outlook.
Good and we will take you through the details, but I am pleased to note that and every international region seeing positive advertising growth for 2020.
For the record shares in Q1 for major markets like UK, 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.
Us confidence and 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 for.
And 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 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.
Exceeding our expectations.
Okay.
And are effectively managing through as dynamic fluid and exciting time as I have ever seen and my many years and 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 of success is for the future prospects for the company.
Of equivalent importance as our core linear business.
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 our near term outlook and we would 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 itself for about as possible. This morning.
2021 is off to a great start.
As David just mentioned and which I will provide a little more context around them.
<unk>, particularly in the U S, where we launched at the beginning of this year, the cross engagement and monetization and churn and applied customer lifetime value continue to reinforce our belief that prioritizing investment and discovery, plus we will generate superior returns and cash.
As noted engagement is truly stellar with you and 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 and then be 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 a stable monthly churn rate for retention curve for our first subscriber cohorts are looking very encouraging based on these early observations, we expect churn to trend towards low single digits over the course for the next 12 months.
Turning to monetization, which was also well ahead of time.
Blended ARPA for discovery, plus and the U S is already at $97 linear tech buoyed by the strong monetization of the Adelaide profit for Arco has already exceeded $10 and the first book.
Clearly strong engagement and watch time, despite offering only for minute AD load and lending themselves to healthy advertiser demand and the term exceptionals.
Still early days, but we see a multiple path for further monetization as we continue to scale and drive additional engagement attract additional advertising and brand and rollout new advertising products.
Global our book is over $5, a day with international and <unk> as expected below that of the U S. This is in part due to the market price points and in part because we are launching the greater share of our subscribers coming to multiple partners.
Which drive faster adoption and marketing efficiency, but also come out and initially no arco.
That being said, we are and virtually all cases are proof that our multiples above the existing wholesale linear ATP and which we currently monetize.
This of course is a core tenant of our international discovery plus strategy and the brake objective Testament for the quality and value of our content and the marketplace not limited by the boundaries of traditional pay TV ecosystem.
Taking these metrics together, we are modeling a much for subsequent of estimated customer lifetime value. While subscriber acquisition cost is currently running at a very healthy cushion for 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's still too early to formally update this number and we believe there is meaningful upside for the target based on all of these initial indicators trending above our business case.
During the first quarter next generation revenue increased 52% year over year, and we look to build upon this momentum and Q2 with next generation revenue set to more than double year, driven by both volume and 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 play in key international markets.
A sizable portion of which was dedicated to upper funnel brand marketing and build awareness as well as bottom up the tunnel performance volume.
This accounted for the vast majority of the year over year increase in Opex.
Alongside content and textbooks.
And the aggregate Nextgen <unk> losses were roughly $400 million and the first quarter.
We expect a modest sequential improvement and Nextgen losses in Q2 as continued substantial marketing efforts for rollout additional territory and relevant content and tech spend will begin to be offset by more material revenue contribution and also we expect to better optimize and refine marketing spend and we gave additional insights quarter to quarter losses and quite possibly what.
Ultimately falls into 'twenty, 'twenty, one 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 won't be Olympic games planned technology spend and platform integrations as determined by specific car.
That said, we continue to remain confident for 2021 will represent the peak year for us from our investment initiatives.
And of course, we are mindful as ever about the magnitude of these expenses the impact on our financials yet.
And we are reassured 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 to true universe estimates and put levels accounts.
Which ultimately translated into lower impressions across the industry and our networks.
That said, we continue to outperform our pay TV network peers on share during the quarter. Moreover, pricing remained robust scatter CPM develop and strongly during Q1 and expect it to be up about 30% year over year with roughly 60% premium versus upfront and Q2.
And in fact total dollar volume for Q2 scatter will be up considerably and stuff.
Here as we see categories, such as auto and travel coming back and loss from the influx of DTC companies, including many new TVN.
Discovery plus had started.
Advertising revenue in Q1 and subscriber growth throughout the quarter, and we expect and the increasing tailwind from this component for Q2.
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 patients.
U S distribution revenues were up 12% volume.
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 for 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 carriage formation affiliate renewals and continuing share gains and virtual mvpds.
We remain very well, Canada across all key platforms.
In addition to our healthy traditional affiliate and the launch of discovery plus and the subsequent ramp up of subscribers accounted for much of the sequential acceleration distribution revenue.
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 and in Q1.
Turning to international networks, which I will discuss is always on a constant currency basis advertising for <unk>, 8%. During the first quarter is all 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 intermittent lockdown and certain EMEA markets. We saw mid single digit growth across the regions 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 and substantial declines 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%.
And the National 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 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 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 continued brand and company investment support for our next generation initiatives and the timing of sports company in Europe, partially offset by more efficient content and then.
SG&A increased 48% for 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.
And our business.
Turning to free cash flow, we produced Q1 free cash flow for $179 million for the nailed it up for 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 and added 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 view and restaurants and discovery.
First 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 and 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.
And while we are investing against a rigorous financial framework bear in mind that we are gearing up for true sense 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 brands.
We'll of course continue to update you on our views on capital allocation.
With water.
Water and approximately three five times net leverage and needless to say remain fully committed to our investment credit rating.
Turning to a couple of housekeeping items.
Number one as you may have noticed we are no longer disclosing adjusted EPS available and free cash flow continued to be the key financial metrics and value add and our operating performance.
We will however, provide you with the PPA impact each quarter as well as point out T noteworthy items to help calculate and adjusted EPS number to the extent helpful.
For the first quarter PPA was 32 per share.
Number two we expect FX to have roughly a positive $40 million year over year, and revenues and around and negative $25 million year over year impact and to EBITDA 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 linear business.
And our ability to convert <unk> and free cash flow for our continued to see at least 50%. This year has never been more valuable given the investment.
We have a self funded business aimed at supporting and immense global direct to consumer opportunity.
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.
And ladies and gentlemen class quick question. Please.
And the number one and your telephone keypad.
Just a moment for topic Q&A roster.
Your first question comes from Robert Fishman with marketing and consumer your line is open.
Full year core U S affiliate fee growth for after excluding nexgen revenues for <unk>.
The full year and then more broadly have you seen any pushback.
And for launching discovery bus and domestic affiliate fee negotiations and maybe if you can talk to whether the launch of discovery Plaza and Xfinity should be viewed as incremental or cannibalistic to your overall partnership with Comcast. Thank you.
Okay. So.
Good morning, and let me, let me take let me start with that last question.
We're super excited about the upcoming launches here as you have seen and 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 answering your question I do think there is a significant incremental impact that's what we've seen with other deals coming online.
For launch so.
And that should be a positive and.
We also look at other events happening internationally over the next couple of months that arent for Petrobras.
And that's absorbed the subscriber growth here, most importantly, obviously as the Olympics coming and internationally and so.
That's for the for the subscriber.
And here to your other question on.
And 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.
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 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 and our.
And for our core networks.
And as I said, we've continued to enjoy a roughly mid single digit growth here and the linear.
Part of the ecosystem.
The.
To your question about renewals and and impact of discovery plus book.
As I said, we are continuing to get a fee increases.
One of the reasons, we have been able to continue the growth that we have delivered and the <unk>.
Fourth quarter, now and the first quarter and we have been.
We're seeing very positive.
Discussions for for the past renewals and for all.
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.
Cold look at what the economics are and we are delivering close to 20% of viewership for our affiliates for a great partner, we're leaning in and where the investments this company and the messaging 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 rate.
And so again.
And I want to make any predictions here and individual renewals budget those are constructive discussions and and.
And we feel that we're in and.
And a very good position.
And the only thing I would add to that is the outside.
Outside the U S.
We've been doing well.
We have partnership arrangements, whether it be Vodafone or sky, we're seen as a real positive and.
The fact that Comcast Brian is a great operator.
And as launched us on flex, we're now going to be launching on X one so.
And so we're really effectively we have two sides of a 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 make free.
<unk> value for us and for them by and I think they have some.
They have some real entitlement their broadband leader.
And these.
These channel stores have really developed and and Comcast is looking and between flex and X one it could be a real generator of value for both of us and as Gunnar said.
And the share of our traditional channels are going up.
They are selling those channels the cost of those channel is a very low and <unk>.
Probably the best actor in that space and that we're providing the core value of the bundle and we have renewed some deals since we launched discovery 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 sales.
Growth outlook here for for all 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 it is going to depend on the cadence of the subscriber additions on the DTC 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.
Keith.
Maybe just maybe and underlying high single digit growth quarter.
Which is going to come through as a.
<unk>, sorry high teens high teens growth quarter, and which is going to come through.
Exploration against the 12%.
Thank you Beth.
Your next question comes from Doug Mitchelson with credit.
Your line is open.
Thanks, so much kind of hard to fill them for questions here I think Dave and David first for you.
How are you balancing content and.
Go versus discovery Cros, 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 price I think thats for number one I think number two.
Upfront looks like 50% to 20% for CPM.
Year over year. It's early we've got a ways to go but the setup looks very very strong any thoughts.
<unk> for discovery and comments on that and and if I could tag on a quick one AD load at four minutes.
And when does that start increasing or do you just leave it at for them and that's because it's good enough. Thanks so much.
Thanks, Doug.
And the upfront book.
I don't know that Ive seen and 50% increases in and CPM is off of a off of.
Prior year upfront before.
The 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 and have that and now all of a sudden instead of being and where.
We're booking a significant we're really making progress and booking significant dollars and in 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 discovery or whether it be shows like like.
And 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 at a very high level. So I think we hit this upfront did a very good moment and.
In addition, we have now some scale inventory on discovery, plus which is selling very well and in the in that environment and on DAU. We don't have the disadvantage of.
A subsidiary viewers a viewer.
And 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 and we're seeing and traditional so overall I think the advertising market very very strong upfront and coming out feeling good about it.
And in terms of balancing.
The idea of it debt.
The 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 and top shows from our channels are only generating about 10% for the viewership and 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 time.
We don't have like the one that we don't have and.
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 debt 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 is now on discovery, plus and we have more coming.
And we will be doing that globally and in 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 for discovery.
Look we're continuing to obviously.
With all that great local content, and we set up and the beginning of our power outside the U S is this combination of great local IP with.
For Universal 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 and people and the success, we've had to date and the markets knowing that obviously since we launched and started talking about discovery plus and success over the last few months we've launched.
No really 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.
And.
The expectation of the content, we are investing and we.
Windowing and in some cases earlier on discovery plus and <unk>.
And then getting a sort of a 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 it's one that we're continuing to look at the data and the response of the consumer and continue to modify and adjust as necessary.
And the thing I'd say day for the question also about the four minutes of advertising, we obviously market the services five.
And so we we came out with a lower AD load than even what we marketed and youre going to continue to stay at that level and 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.
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 their consumer experience here as we 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 and underlying positive.
But if you just take a step back why are we still excited about this number one.
We've seized to just sell commercial demo, it's a big difference between the linear TV and our.
Digital platform here, we're selling every single eyeball on discovery and TV everywhere for that matter and number two is we've got a really level playing field here the big gap between book.
And cable Cpm's that we've been discussing for im seeing for for decades here just doesn't exist. It's premium online video and we're getting full value for for our product not only debt. 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.
Family friendly content environment.
And couple that with the fact that debt.
Premium online video inventories scars and the first place because a lot of the viewership is happening on AD free platform that drives super high demand and and.
And a 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 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 that we're working on more and it's in a way it's.
Part of the prioritization exercise year to get all those features online.
But there are a couple of growth other ideas.
So I do think debt 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.
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 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 in the sustainability of those trends compared to perhaps maybe more drastically pivoting towards streaming and then I have a follow up.
Yes.
On the international question in terms of pay TV universe, we're continuing to see a kind of stable to up slightly and our universe across the world. We have seen which we've been seeing actually for years, it's not necessarily a new trend and unlike.
And 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 investment and 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, and 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 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 Disney news about the shuttering of the agent channels look I think we.
We've obviously leaned in and not to say, we could have shut for.
Full portfolio of channels, but as we've talked to you before selectively in markets, where we think the long term opportunity and what is.
Possible with discovery, plus and the Rps that junior and David talk through where there's an advantage there.
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 book Rolls out in more markets internationally, obviously that opportunity.
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.
Both our AD revenue and affiliate revenue and revenue is growing dramatically, but it also gives us a relationship with every distributor and what we're able to do is provide a value to the distributor and 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. So 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.
<unk>.
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.
And advantage for us.
And that's great.
Go ahead and 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 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 as 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 see a 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 puts and takes as we think about what seems like a very favorable setup.
Well I think you've just done that I think 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 for breakeven etcetera I continue to be Super Super happy with the metrics that we're seeing for <unk> for.
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.
And both the pay numbers, which.
Top of the industry churn rate and again I don't 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 and that just.
It leads to a customer lifetime value estimate right now and one of these 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 new subs at.
Pretty efficient subscriber acquisition cost impact a lot of the losses that we're looking at here for for startup investments and the quarter.
And is essentially in the book.
And Thats majority of it 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.
And as we are benefiting from the high retention that we're seeing and these and our.
Our subscriber base so.
And all that together again, it's just too early to start talking about.
And updated margin profile for for 345 years out, but we feel very very good about it and so at this point about breakeven again as we said before it's not a metric and managed towards as long as I can I can acquire subscribers here with phenomenal lifetime value is at a fraction of debt.
Effective cost of debt lifetime value, we will do it and we.
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 and get to breakeven or scaled margins much earlier than anyone else just because 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.
Our content, we continue to be and super efficient verticals debt.
We're super strong and and that we have 30 years of experience and and we continue to exploit our content across platforms and across the entire globe and.
And it's amazing to see how this model and again, it's early days, but how it is working where we.
And we're getting phenomenal cross pollination between our TV everywhere environment and discovery plus.
It's.
And it's great and then.
And then 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 and how does that compare to what youre hearing from others.
And 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 give.
Giving you a long term five year outlook for sale.
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 just please elaborate a little bit more on the channel of the typical consumer and your ear and discovery.
Discovery price it sounds like you are skewing favorably towards the channel that advertiser, and particularly excited about reaching and I'm wondering if given your outside of <unk> SaaS and the online option and interest during your promotional activity in a more toward that option versus the App free and then my second question and just Mary Ellen on the moderation of linear decline.
<unk> got such great and packaging industry and I am carrier Christa.
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.
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.
And as we get bigger and 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 AD light, we've been talking to those customers and it for minutes and hour they seem very happy.
And the AD free and 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 pushing on add light and in it.
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.
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 and.
As we get the scale more than that by doing the add light and you have a very good customer experience.
It was a surprise to us we really see what people are used to 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 for 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 the moderation of sub losses, and 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.
Our results were.
We're getting additional carriage and some of the renewals of last year and Thats helped us and we obviously continue to be among the best.
Distributed across the virtual Mvpds space. So that's been for those two up and to help with that.
And 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.
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 and some of our newer deals.
Yeah.
And that we might we'll probably do better.
Thank you very much.
Your next question comes from Rich Greenfield with the right partners. Your line is open.
Yeah.
Hi, Thanks for the question.
David.
Okay.
Plus user and we're spending three hours per day and that would be and Yep can you hear me.
Yes, we can.
Sorry, I don't know what happened.
David I think you said before a couple of times that 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 wanted to make sure is that across the meaning is that 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 view universe had an impact on AD sales could you just maybe explain whats happening in terms of is the shrinking pay TV universe pushing.
More towards things like discovery, plus and digital what exactly was the reason that comment and how do you think that comment plays out over the coming.
<unk> for 24 months.
Okay. Thank you rich, let me clarify that.
Free hours per day or per viewing sub.
And so not per average and you can assume that we have about close to 50% active subscriber base on a daily basis and so thats.
That's how you would need to interpret that number again I think.
Youre right.
It's a great great statistic.
The ecosystem and we're super excited about it.
And the point about the universe of shrinking it's just I mean.
And as I laid out we gained share and by the way both domestically and internationally across across the first quarter and.
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 tells and the thing that we.
We were up significantly during the pandemic.
And we were able to produce content and we were really able to grow share pretty pretty significantly.
Everywhere and the world.
Some of our channels like TLC and <unk>.
And discovery and.
And HGTV.
They don't have the same cycle that that script. It does but we werent able to produce a lot of them tend for those we're now back to about 90% and 95% and youll be seeing more of our fresh content coming in.
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.
Some of the fixer uppers that we go to debt.
We were we had some of the impact for 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 a 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 youre now back for like full capacity.
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 already.
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 it's pretty fluid.
We have higher production values, we spend that we 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 Joe we haven't put anywhere except for discovery plus that was a big helper to us for the BBC content will only be on discovery, plus well try and we're experimenting with and we put.
And 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 and in.
And internationally, where 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 and as David and <unk> talked about before.
Is 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 went out here and so the exclusivity that you exist and scripted which for.
For 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 and different ways to try and see what what the data tells us we're experimenting with some early windows or pulling and 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 can do a little bit of both it's continue to produce great original and stories for our traditional telco and give people and ability to want to access that and warrant subscribing to it on and.
And the bigger bundles and access to an a and b plus.
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 is the only point I would add is the reason I talked about and my comments about Italy is 80% for 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 pay and business.
We have a huge library haven't been in these markets locally for 15 20 years that we could now go to and offering at a very low price and be available for 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 is now new to the overwhelming majority of the population they have heard of it they've heard of it they have good feeling about it but maybe they couldnt afford to buy it for they want it at a different device, but it's a different calculation, but David it's also its most extreme and some of those.
International territory, but to some extent, we see the same here domestically as we laid out we're up for the first time, we are now targeting 30 million homes.
And that don't have a cable subscription and what we're getting.
A significant number of additional viewers and 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 is going to is going to raise all boats. Because we're just creating more of what we're best debt, which is our our global.
And 100% owned.
And our high quality IP.
Okay.
Okay.
Okay and.
Our next question comes from Brandon and start with Keybanc. Your line is open.
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.
Seen retentions after the first month and greater less and 90% maybe just some more color there would be helpful. Thank you.
Yes look.
And as I said before we're very very encouraged by the retention curve, we are seeing more than 90% retention and we're starting one step earlier very very strong role to pay of north of 80%. After the seven day free trial talking U S. Here, and then greater than 90% retention and the first month and then a very very significant drop off and sort of co.
Our churn and 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 they're also stacking up very very nicely against the competitive offerings again, it's early days.
I always want to display that we could not be happier and I think it and.
It makes sense. If you look at the length of tune that we've always been seeing with our viewership and many of US well, we're essentially saying the same but seeing the same behaviors here in <unk> and <unk>.
<unk> World.
And then then on long term churn expectations, where do you think you've Paul you said low single digit but is that 2% to 3% or is that more of a 4% number.
Thank you.
Well.
Look.
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.
For two months for three months and say this is where it is 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.
And even if it we think it's trending it's trending down if we think that that may change over the next couple of months.
For the good or bad, but right now the 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 and.
And again, what we're looking at right now is really that.
Estimated customer lifetime value.
And im very very significantly.
Share it with what we put in our initial business case that was the foundation for what we presented and in December and how that relates to subscriber acquisition costs and.
And clearly if we're looking at and our numbers here I have to Greenlight 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 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 for your 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 for 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.
And 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 just sort of and the right place if that makes sense.
For it.
I mean.
The question is spot on and then because I mean, we are sent to the matter is we're looking at too.
Net revenue streams here now that have fundamentally different.
Financial profile.
So the idea would be indeed tempting to say, okay, we have a digital business and our linear business.
This is nothing reality right now and maybe less so for us than for others, just because we have that.
Amazing.
IP exploitation model one of the big advantages that we have with our ability to take so many 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 JV and his team are very much looking at international markets and an aggregate basis and some of the tradeoffs and decisions that we've laid out are very much.
Focusing on trading of 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.
Book 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 for short term outlook about how we expect those loss to be trending.
And we're trying to help you model does and as I said earlier I would I would assume those startup losses to start tapering a little bit and the second quarter and then I'll also want to have the flexibility to lean and 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.
And give you and understanding of.
Of that financial profile and as I said.
I am focused on long term sustainable growth for this company I think that's what's going to drive shareholder value.
And I mean, if you just looked 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 and international distribution growth too.
Mid single digits I think again, it's early days.
I would say it's working.
Yes, no and 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.
And.
Yes.
Yes.
Yes.