Q2 2021 Discovery Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome Peter Discovery incorporated second quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
The conclusion after the speaker's presentation, there will be a question and on first Washington also please be advised that today's conference is being recorded I would now like the conference over to Mr. Andrew <unk> Executive Vice President Global Investor strategy, Sir you may begin.
Yes.
Good morning, everyone.
Thank you for joining us for discovery is Q2 earnings call. Joining me today are David Zaslav, President and Chief Executive Officer, Gunnar of Eaton cells, Chief Financial Officer, and JB, Perrette, President and CEO Discovery networks International you should have received our earnings release, but if not feel free to access it on our website.
To Ww corporate debt discovery Dot com.
On today's call, we will begin with some opening comments from David and Gunnar and then we will open the call to take questions before we start I'd like to remind you that today's conference call will include forward looking statements that we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with forward looking statements include comments regarding the company's future business plans prospects on financial performance.
As well as statements concerning the expected timing completion and effects of the previously announced transaction between the company and AT&T relating to the Warner Media business. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations.
Providing projections and other forward looking statements the company disclaims any intent or obligation to update them for additional information on important factors that could affect these expectations. Please see our form 10-K for the year ended December 31, 2020, and our subsequent filings made with the U S Securities and Exchange Commission and with that I'd like to turn the call over to David.
Good morning, everyone.
Thank you for joining us for our second quarter earnings.
Discovery continues to deliver strong operating and financial performance driven by healthy momentum across all our key segments.
With our core linear business, which continue to accelerate sequentially.
Underscoring the durability of our content categories on the overall strength of our brands.
While simultaneously scaling our global streaming offerings, most importantly discovery plus.
Which continues to have strong traction on.
Underpinning total next generation revenue growth of 130% year over year.
And $17 million total global paying direct to consumer subscribers at the end of the second quarter.
$18 million as of today.
With momentum around the globe, most notably behind the strength of the Olympics, which we've launched on discovery plus in Europe, and a number of markets.
The Eurosport player with discovery plus has yet to launch.
We've had some fantastic traction thus far.
We are excited about prospects for the second half of the year as well as for the Beijing Olympics.
More on all of that in a moment.
The combination of continued strong execution across our core business, while scaling our streaming platforms drove healthy top line growth and strong OIBDA and free cash flow conversion supported by vigilant on costs.
Gunnar and his team continue to do a terrific job leading transformation across the organization with an eye toward continued efficiency.
Particularly as we absorb investment spend to support the growth and rollout of discovery, plus and we delivered a meaningful sequential improvement in our investment losses.
As we lean into monetization and begin to see the benefits of scale from an expense base.
In fact this quarter annualized next generation revenue is $1.6 billion.
And we see additional revenue growth ahead.
In terms of the core as you've heard from our peers the industry just wrapped an incredibly healthy upfront provide.
Providing us with a level of visibility we have not seen in quite some time.
John Steinbach on this team delivered top of peer performance and.
And a record for our company a testament to the programming and brands that viewers love.
And then our advertising partners value as well as our differentiated suite of products and platforms available to reach consumers in an otherwise increasingly fragmented marketplace.
We achieved rates of change inclusive of the stepped up performance of discovery premiere.
We're well ahead of the peer group.
Premier has proved to be a great success.
Our unique vehicle that packages first run episodes from our most popular series of networks.
On the sales more than doubled.
Over 200 clients are now buying premier day enjoy ratings and reach that is equivalent or greater than broadcast prime.
But it is significant CPM discount <unk>.
<unk> heard me tower. This is a true win win.
And we keep driving this forward and clients love it.
Moreover, demand for a bouquet of digital properties across discovery plus our go apps.
<unk> and sites with social with robust.
Advertisers continue to look for incremental reach beyond linear and with roughly half of the audience based on discovery plus the non cable households.
Platform is hugely attractive to buyers.
We look forward to additional product features and offerings to rollout throughout the year to drive further monetization, but what we're currently seeing is noteworthy.
Advertisers are buying targeting capabilities of our platform with innovative and intelligence solutions and healthy premiums to traditional linear.
Internationally advertising has also come back in a big way driven by a number of key markets such as the UK, Italy, Germany, Poland as well as a number of Latam and APAC markets that resulted in all regions around the globe, turning in an acceleration and traction throughout the quarter.
Turning to discovery, plus we are really pleased with the cadence and monetization of the service.
Supported by continued subscriber traction and healthy ARPA, notwithstanding the seasonally slower summer period.
Only exacerbated by the post Covid reopening.
That said, we had healthy sequential improvement in paid subs quarter over quarter with most of discovery plus international runway still ahead.
Here in the U S. We continue to add to our distribution and platform footprint.
Following last quarter's launched with Comcast in the coming months discovery, plus will also be available to <unk> subscribers across their contour television and contour screen player platforms.
<unk> plus will also shortly be available on vizio smart cash.
Advancing our rollout to all major consumer platforms.
As we've noted previously the bulk of the 2021 discovery plus international market launches would be in the second half of this year with key market launches, such as Brazil, Canada, and the Philippines to come in the second half of the year.
Vodafone successfully launched in July in the U K market from mobile customers and we expect additional markets such as Spain, the Netherlands, and Italy to launch as planned following the migration of our front end technology to a common global platform. This fall.
Jamie and his team have been deliberate and methodical in managing our international rollout to ensure the best consumer experience.
This includes ensuring we have strong integrations with local partners and completing a major re platforming to get both our front end and back end technologies on 1 common platform.
It is a complicated roadmap of engineering and commercial logistics not to mentioned COVID-19 challenges around the globe and some of our tech hubs at.
At the same time that we had been planning producing and delivering the Olympic games from Tokyo.
We continue to learn a lot as we go.
In terms of what's working and what's not with respect to marketing branding tech product and features as well as distribution partners and platforms.
We're very pleased with the metrics, we look at to evaluate our position within the marketplace consumer acceptance.
To pay you.
Viewing time per active subscriber churn monetization and solar.
We provided an early glimpse across these metrics last quarter.
And I am pleased that we continue to track well against our internal plans.
And the momentum we are building as we look ahead to our exciting plans post merger with Warner Media and HBO.
Taken together, we could not be more excited about the possibilities ahead to serve consumers with the deepest and most compelling content offering in the world.
Consumers want choice and simplicity we.
We believe that the combined company will be able to offer more of both.
In the video market that could see more consumer selectivity at the market from stores. We believe the combined company will be well positioned to compete in the global streaming marketplace.
The regulatory process continues to move forward as planned giving us confidence in our previously stated timeframe of mid next year to close.
And lastly, the Olympic games in Tokyo, which as I noted earlier, it's been a very pleasant surprise during what can only be described as challenging circumstances.
At this point about halfway through.
<unk> doubled our total sub gains from the lack of Olympic games in Pyeongchang.
With nearly 3 quarter of a 1 billion minutes of Olympic content streams up over 18 times versus the last games.
Like with the winter games, we've enjoyed some truly remarkable viewing shares in key markets like the nordics in which our share of TV viewing for certain sports has been upwards of 60% to 80%.
With outstanding traction with streaming across all markets, notably in the UK, and Italy, which are newly launched markets for discovery plus.
We are very excited about the upcoming Olympic games in Beijing in early 2022.
On net of cost Paris in 2024, right in our backyard.
These are truly hallmark high value branding events.
And our Super funnels that drive awareness viewing subscribers to our platforms.
With that I'd like to turn it over to Gunnar to take you through our financials, after which Gunnar JV and I look forward to taking your questions.
Thank you David and good morning, everyone. Thank you for joining us today for our second quarter earnings call.
Echoing Davids comments I am very pleased with our operating performance this quarter and.
In which both of our traditional core on linear business alongside of our next generation screening platforms combined to deliver very healthy revenue growth from impressive pay over that in free cash flow conversion.
While comparisons against last year's advertising performance were very favorable you were especially encouraged by the acceleration on sequential improvements. We've enjoyed from every region around the globe and returned from near pre pandemic levels. The U S. Latin America, EMEA and Asia Pacific alternative impressive results and of course discovery.
<unk> is providing a nice tailwind to our performance.
Turning to second quarter results, beginning with the U S segment.
Advertising revenue increased 12% year over year as we continued to take advantage of a very robust advertising market for both linear and digital inventory.
Strong demand in all key categories, including CPG pharma cosmetics auto retail and home improvement on more than offsetting the softer viewership across the industry as compared to the peak Covid Q2 of last year.
<unk> loans were up 50% plus versus last year's upfront and up more than 30% year over year.
Additionally, next generation advertising demand was very healthy across our suite of products with revenue up 70% year over year.
Specifically for discovery plus more than 800 advertisers have now bought inventory on the platform more than 4 times. The number of advertisers that we had targeted by the end of the second quarter.
Interestingly more than 90% of all clients, who have bought inventory on discovery plus also bought inventory on a go on TV everywhere offering underscoring the power of integrated audience solutions across our suite of digital products.
Furthermore, we continue to rollout new AD products on discovery plus for example, we recently launched Green light on AD product that allows clients to all the first AD served for every user on discovery plus on a specific day.
As noted earlier the strength of the upfront market underpins the continued relevance and importance of television advertising media contributing to greater confidence in our ability to drive top line advertising revenue growth.
While we faced comparisons against political advertising on the second half of the year and some modest headwinds from the Olympics here on the U S.
Q3 layering into the tailwind from this upfront we should enjoy sequentially faster revenue growth from Q4 over Q3.
Distribution revenues grew 12% year over year.
On a reported basis or 18% line pipe, primarily driven by continued traction on monetization of the discovery plus subscriber base helped by many of our total pricing offsetting the year over year decline in pay TV subscribers.
Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio subscribers were down 7%.
However, recall that we sold great American country during the quarter when adjusted for the sale total portfolio. Just thought this would have been down 3% year over year during the quarter as we continued to benefit from specific distribution gains across certain networks from recent renewals.
We will begin lapping both of them over the coming months and you should expect to see our linear on subscriber trends more in line with the industry going forward as we have discussed prior.
Worth noting also is that the sale of GIC did result in a modest headwind to both reported advertising net distribution revenue this quarter as we did not recognize any contribution from importantly from Florida.
Turning to the international segment, which I will as always discussed on ex FX basis.
Advertising revenue increased 70% year over year as we saw significant growth off the second quarter last year we.
We saw strong revenue growth across all regions with the pace accelerating throughout the quarter with a number of key markets nicely above 2019, as David mentioned.
Distribution revenue increased 6% versus the prior year supported primarily by direct to consumer subscriber growth. So as noted there were no material new market launches during the quarter. This was partially offset by lower linear affiliate rates in certain European markets.
Total company operating expenses increased 33% during the quarter total revenues increased 25% year over year.
<unk> returned to a more normalized schedule this versus virtually no sports last year due to COVID-19 related shutdown.
As well as the continuing investment in <unk> content.
SG&A increased 43% versus the prior year as we invested in marketing and personnel to support our discovery plus rollout.
We continue to focus on driving efficiency in our core linear networks and we remain on track to reduce core and then your opex on the low to mid single digit percentage range for the year.
As we guided we reduced our losses from investment projects significantly in the second quarter to roughly $250 million worth more than $400 million from first quarter benefiting from both strong next generation revenue growth as well as more efficient marketing spend primarily in the U S.
Q2 next generation revenue growth on 130% annualized at $1.6 billion run rate and we expect additional sequential quarterly revenue growth for the year and beyond.
As we launch a new markets during the second half of the year. We expect that we will continue to incur investment losses, so more or less in the same ballpark as this past quarter, mainly driven by content and marketing costs.
We continue to expect that investment losses will peak this year.
Overall, we remain very pleased with all of the core Kpis, we closely monitor and we continue to track well against our internal plan.
Global direct to consumer our pool remains consistent with Q1 at the impact of certain international distribution partnerships and associated early promotional activity is offset by our strong and growing U S, which is nicely supported by the AD like discovery plus product.
Relative to pay still remains high at an average of close to 80% across the global PVC portfolio.
<unk> average engagement per subscriber, which is more or less in line with what we saw last quarter.
As well we remain pleased with the overall term, which naturally is at the lower end from our most mature subscriber cohorts since he was higher for the most recent line.
As I noted the vast majority of our international Discovery Hospital, thus far has come from existing park.
And we plan to launch a number of key markets and territories during the second half of this year, including Brazil, Canada and the Philippines.
Alongside the additional bolt on hallmark it'll.
The Netherlands, and Spain or on the end of the year.
It is worth highlighting that a handful of these market launches have been extended out with about a quarter or so later than our original internal plan call for primarily resulting from the electrical harmonization of our technology platforms. The added benefit of which will enable us to roll on to the international outlet product.
This has been a heavy lift, particularly given <unk> constraints related to Covid and our tech hubs primarily in India.
Other puts and takes to consider will be our ability to maintain and keep subscribers that come in during the Olympic games total the initial Walter pay numbers look very encouraging.
Net net we remain very excited about our local go to market strategies across these important countries through the end of the year.
Turning to housekeeping items net income for the quarter on about $672 million or 1 bar on 1 cents per share on a diluted basis.
First please note we recognized a <unk> <unk> per share gain on the sale of great American country as well as a 9 <unk> per share non cash gain on an existing investment in <unk>. The company that recently went public.
Second our effective tax rate during the quarter was negligible as we recognize certain non cash tax benefits totaling $162 million or 24 per share given the tax benefits. We now expect the full year effective book tax rate to be in.
Mid teens range.
For cash taxes, we are now anticipating a slightly higher rate in the high 20% range for the year, excluding PPA amortization.
As we are positioning our tax footprint for optimal outcomes across a number of legislative scenarios for 'twenty 2 and beyond.
Third and finally, the PPA impact was 30 cents per share.
Adjusted for the above EPS would have been <unk> 89 per diluted share.
Now turning to free cash flow on our leverage we generated $757 million of free cash flow in the quarter, representing a near 70% conversion rate of annual EBITDA notwithstanding.
<unk> investment, we're making as well as a return from normalized content production levels.
Year to date, our EBITDA to free cash flow conversion rate of nearly 50% and we remain confident that we will convert at least 50% of our aon without the free cash flow. This year, even with the anticipated new market launches on slightly higher cash taxes mentioned earlier.
At the end of the quarter, our net leverage was 3 on a quarter times, which is within our current target range.
We expect our net leverage could be temporarily at the high end of our target range due to the Olympics from the current quarter. As a reminder, we do expect to recognize a $175 million to $200 million of AOS losses during the third quarter as a result of the Olympics.
So we continue to expect that we will break even or generate slightly positive EBITDA and free cash flow over the life of the deal.
As indicated when we announced on our transaction with more on our media, we did not repurchase any shares during the quarter as we continued to invest on our next generation initiatives and conserve cash ahead of the closing of the deal.
And finally, we now expect FX to have roughly a positive $100 million year over year impact on revenue and a negative $20 million impact on a over that in 2021.
We continue to operate on solid footing dynamically growing our direct to consumer business with contributions to our top line growth, becoming increasingly meaningful and optimizing the resilient core linear business, creating strong conversion of EBITDA to free cash flow.
We remain focused on delivering solid operating performance, while we built the framework to support long term sustainable growth on shareholder value and.
And we are eager and excited once.
Once we gain all the requisite approvals to roll up our sleeves to capture the tremendous opportunities offered by our proposed merger with 1 on media.
And of course, we look forward to speaking with you at the appropriate time on our thoughts and plans around integration strategic direction synergy et cetera, the debt.
I'd like to turn it back to the operator to take your questions.
Ladies and gentlemen, as a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question from County. Your first question comes from cut on morale with RBC capital markets. Your line open.
Good morning, and thanks for taking the question just on direct to consumer can you help us better understand the international rollout of trajectory I know you called out Brazil, Canada, Philippines in a few European markets with Vodafone for the back half of this year, some on visa, particularly big broadband and mobile market I'd be curious.
<unk> market launches for distribution partnerships, you see as the biggest opportunities and maybe more broadly how are you thinking about the subscriber momentum into the back half of this year, especially and there is some concern that we might see some churn pickup with sandy distribution partnerships and that had fixed line promos and then just.
Lastly, I know, it's early but any thoughts on the international rollout looking between 22. Thank you.
Okay. So.
So.
We have as you noted we have the markets, we've announced that will be rolling on and I think we feel very good about them when we announce when we get closer to the actual release day. We will also be announcing in many of the markets as we've done to date, both in the U S as well as internationally.
Partners that will be launching with so you should expect sort of fairly consistent to what our historical precedent has been some strong partnerships and a few of those markets that we rollout and so we feel good about that I think as Gunnar touched on in his comments.
We are the ones that.
Sort of leaning towards more sort of September and into the fourth quarter.
Where we had hoped obviously to be slightly more ahead of that it could be.
Into the third quarter, but due to obviously wanted to make sure we got the Olympic games off the ground successfully and getting this re platforming completed.
That will hit a little bit later in the second half of the year than we are.
Initially thought.
And in that time period, I think we do see internationally from some obviously, we're expecting significantly more growth coming out of those new market launches as we get towards the back half of the year.
As it relates to 'twenty, 2 I think it's a little bit early to talk about that the only comment which.
David and Gunnar made amplify is obviously as we get later into 'twenty to 'twenty 2 when we get further visibility on the timing of the Warner media deal.
Obviously, we will look at making sure we stay smart in the context of when that timing on when that deal might close to how we maximize the <unk>.
Rollout schedule of those services into 2022 so.
That's I think as much as on our lunar David if you want to add anything else such as much.
Ed.
The execution on the Olympics.
Was.
Really almost flow a scan.
All of our the entire Olympics was offered.
Throughout.
Europe on our product.
People are spending a huge amount of time as you've seen at 18 times what it was before.
For for Peering Chang.
It was very simple the navigation with simple we spent a lot of time, making sure we get the product right that's going to help us, but we're also as I've said, we're learning 1 of the things that we're that we've learned along the way is navigation and simplicity is very important for people, who are you able to find the products that they want particularly with a complicated.
Product like the Olympics, and it's really working we will have.
Jean coming up in a few months, it's very unusual that we get a back to back like that so we think that we can do better in terms of keeping subs and growing subs because we don't have a.
A 2 year lag between the 2 games, which is advantageous the other thing that we're learning as we look to roll out outside the U S.
Is that and light is a really compelling product.
We're generating about $6 and advertising per subscriber here in the U S with 3 minutes of advertising and the the friction for users is nonexistent when they used to seeing 14.18 minutes to see 3.
And so there may be a real strategic opportunity for us here, we're doing extremely well and packaging that product together with linear.
Together with with <unk> here in the U S and so whereas a year ago, we thought everything would just be subscription we're looking at cash.
At Avon as a meaningful opportunity to go into markets at a lower price get more scale and be able to pick up actually more money, we're making more money on our AD light product by an awful lot here on the U S and so doing that requires more engineering more coding, but we want to get it right and as JB said as we get closer.
2.2.
To the Warner Brothers discovery to our transaction, we will continue to look right now, we're both accelerating and Warner's doing a terrific job stay John Stankey.
And then Jason you take a look at and Casey you take a look at.
The momentum that they have there.
We're driving hard we're driving hard and then we'll true up together at some point, we really do have our strategy, we cant share. It with you right now, but we will look carefully as to how we want a true these up together and so that might affect.
As we get closer to the approval.
What exactly we do knowing that when we're coming together as a new Cup.
And maybe 1 thing that I would like to add.
Your question on on churn so that continues to track very nicely ahead of our plans.
And most importantly roll to pay is also very stable as I said close to 80% across our various products.
To your point about some of those distribution partnership starting to come off of the initial period, that's another area, where we've actually been positively surprised.
So a little lower there as you would expect but not.
As a meaningfully lower as we had modeled it has actually been a positive surprise.
The next question.
And your next question comes from Steven <unk> with Wells Fargo. Your line is open.
Thanks, once a day to day 1.
David.
Some question points suggested that you might have made some comments at Sun Valley about the merger, maybe timing and further industry consolidation for those of US. Some 1 on budget. So I was wondering if you could just maybe expand on on some of those comments in this public forum.
And then Gunnar I think you reiterated being at peak investment this year in terms of the annual EBITDA drag at Nextgen.
Think about the margin.
1 on media and the DTC services I know spending on content remains pretty sacred, but when you think about that.
On the truck.
She might decelerate, but you're going to be combining all these systems at some future point then.
Has that created any upsides and maybe the 5 times leverage target let me. Thank you.
Thanks, David.
But let me first speak to the merger timing I was in DC last week.
Net with across the board spent a full day.
Yes.
Broad support for this transaction, we haven't heard any pushback, we haven't seen any push public pushback.
This becomes a very strong company for consumers.
A more compelling streaming.
<unk>.
And so right now it feels to us on every level like.
We've seen green lights, we're not seeing any yellow lights on red lights, having said that we're not in control of the timing Disney was able to get their deal done in 6 months.
Everything so far is extremely positive, but some of the timing with respect to the IRS IRS from the Doj.
We can't.
They're working very effectively with us the AT&T team and John John has a terrific team that's working with our team.
Ultimately it could be it could be significantly sooner it could be a little later, we're just not in charge of the of the timing, but we feel very good about it at this point.
There is nothing that we see and we're still hoping that we could really get lucky and it'll happen a lot sooner and that's what we're all pushing for it.
On consolidation.
Look I take a look at this business Warner Brothers discovery.
And.
There's just the toughest thing to do.
To put together, a great library or a great menu of content on it that.
That is the that is the most difficult thing to do yes, we need a strategy on what the price is is it additives that add light exactly how do you go to market in each country, but the toughest thing to do is come up with a menu.
And have the strength of content to not only get people to come there, but get them from state and 1 of the things Thats happened since our deal as you look at the Amazon deal. When you look at the announcement of.
With his phone via almost $1 billion for that basket of content 8 almost $9 billion from the basket of content that debt.
MGM has great company.
<unk> developed a great company.
We own a significant amount of the MGM library. This new company when it comes together Harry Potter <unk>.
<unk> Com Godzilla Batman game of Thrones, you look at what Casey is doing right now with hats White Lotus Mayor of East town section on the city coming back.
<unk> spreads reunions.
Space Cam, having a big week, a big week against the against the Marvel properties and so.
Which toby put together.
And Jason they're sitting on top of.
Just an extraordinary library of IP Hanna Barbera all of these things you cannot create and so we look at all of that and we say we can't wait to close we think we have the broadest most compelling.
Together with what discovery Hasnt as Warner said, we're seeing over 3 hours of engagement our churn is very low.
Have great nourishment and.
The combination.
Harry Potter King Kong, Batman together with all of them with all of our great nourished in content globally at all of the local content, we have around the world as well as sports and news, we think makes us really compelling having said that you look at here's 2 transactions that have happened people need more IP.
I believe that what we have is not only are we do we have I think the strongest set of IP, but we have the broadest global.
<unk>.
We have the most global content in language of anybody. So I think we start off in a very very strong position and I think we're fine if nothing happens, but I believe that over the next couple of years, there is going to be more and more people are going to look and theyre going to raise their hand.
There'll be more consolidation there'll be more IP library, so because you need a lot of content to be successful and I think people are going to take a look at what we have what Johnson. Thank you put together together with what we have and it's really going to be formidable and Disney and Netflix have have gotten across the lake.
And we think that this will be the third global.
Streaming service successful sustainable that's our mission.
And a lot of the other IP that are subscale.
We'll probably be raising their hands on people and there'll be a lot of consolidation and some of that may be opportunities for us, but right now I really like where are we on.
Yes.
Okay, and Steven let me take the other question on peak investment.
Again, I've said, we're reiterating debt that expectation that 2021 as the peak here and again I think it's just it's coming together very nicely like Youre seeing the revenue contributions kicking in.
We're tracking on an annual run rate of $1.6 billion Nextgen revenue is now.
A significant step down on our startup losses from our investment initiatives. Overall, so interest is a mantra that we've been talking about.
Previously and I don't want to go through all the details again, why but we will be able to.
You'll get some nice profitability out of streaming.
Apparently lower.
Subscriber numbers on that.
Earlier.
The second part of your question HBO Max.
<unk> guided to 2022 being peak investment year, that's how we reflected in the model as well.
There's no updates right now as to sort of be diminishing.
Net is familiar with.
Position here.
I'm going on from that perspective, while I don't want to give an update on that 5 times leverage leverage expectation right now.
Again, I view that as a as a non issue we have a ton of confidence that we will very very quickly get to where we need to be.
The next question.
Sure.
And your next question comes from.
Mitchelson with credit Suisse. Your line is open.
Thanks, so much.
Couple of questions. If you don't mind.
Go on.
SG&A was down quarter over quarter in the United States, and you mentioned coming off of a launch marketing or more efficient marketing is this <unk> level sort of a good SG&A level that we should expect to continue.
J D.
And David as well.
David what are you seeing from discovery plus so far in international markets, how does that inform your launch strategy for upcoming markets and in particular, when you think about pricing for this service are you better off pricing at a premium for super fans or pricing Lowe and trying to drive the services broadly as possible.
Thank you.
Let me let me let me take the SG&A question quickly. So the way I would look at this Doug is.
And I said it much earlier in the prepared remarks, I view, this sort of $250 million roughly give or take a level of investment losses as a probably best estimate as of today 4 for the third and fourth quarter that implies since we're assuming revenue growth that we are planning to spend more and again, we want to.
When you're making those investments is.
Rolling product with again, a very very.
Strong long term value proposition. So you should see a general trend of expenses growing.
But very much in line and then overtime slower than on the revenue side.
Yes.
The in terms of.
Our all in mission.
Our all in mission, we're not going to get into how we're going to price in each market at this point because it wouldn't be appropriate we're not going to talk about exactly how we're going to package at this point because we just can't do that right now.
We haven't we have a compelling plan, we're looking at where go on country to country. We're actually trying some different things so that we can learn more.
We're watching the great success.
John and Anne is having them as they accelerate but.
We're focused on $200 million global subscribers. This is not about Mitch. This is about global subscribers and we have for me.
We closed this deal it is going to be 2 absolute mission submission number 1 drive direct to consumer to 200 million subscribers in every language in the world.
<unk>.
With a product that's easy to navigate and use and.
We think we can do that when we close we're both growing so we're going to start with a good base to get there, but that's on the left side the right side is.
Focus on having the best Creative company in the World and Warner Brothers has been the greatest creative company in the world. The placement the talent, who want to come the place where they feel nourished and supported and that's the history of Warner Brothers and most of.
On a great content that debt I've seen that we've all seen we don't even realize that in the end, we see that Warner brothers Shield and it stands for something which stands for great storytelling and we are when it may be the only company that has the ability to.
<unk> focused only on that 1 thing we're not in the phone business. When this deal closes were not in the retail business went out on the cloud business will not only the broadband and cable business.
So that's the focus and that singular focus I think will drive a great culture.
Where people that they care about content that love content that saw the magic when they were kids and they looked up at that screen. That's why we all got into this business and that's the only business that we're in and I think that that together with the fact that Warner brothers itself. We can open a movie everywhere in the world as well or better maybe best.
Of class and Thats not going away the motion picture business is not going away. It's why it's the top of the patina.
1 of the greatest writers producers on creative talent came on when you look up at that Big screen, That's where stars I made and that's where the magic happens and so 200 million subscribers a great team, putting these companies together to drive towards that and a great creative culture with a with at the very top of our motion picture business.
That will be 100 years old in 2 years and it has the heritage of <unk>.
All the great storytelling that we all grew up with that's the company and that's what we're going to drive growth.
Greg do you want me.
Just 1 day I can say on the current pricing to your question on discovery plus.
I will say that what we've seen so far.
The very broad very scaling distribution. This is the international growth is not driven by 1 market, we've seen very even in very significant.
<unk> plus market so far across from our biggest territories. So we feel that it's not necessarily a question on growing high price smaller or low price.
Broader the reality is that were you able to hit the sweet spot right now with the pricing that we have in most of our markets, which is on average for the entertainment tier.
In this 4% to $6.
Price range.
And that that scaling very nicely now again harder to talk about the globe in 1.
Swoop, because ultimately markets, where we have more premium sports, we will price higher markets, where we don't.
And that have lower price.
Sensitivities like Latam or Asia will price lower.
But generally we feel like we can actually get a very attractive price point much higher than our wholesale pricing today and still be in.
On a sweet spot that ultimately deliver scale at the same time.
Right Alright, thanks, Craig.
Yes.
So the next question.
Your next question comes from John David These lead.
With Wolfe Research your line is open.
Hi, Thank you.
Kevin maybe we could start can you give us more color on discovery premiere how much more inventory is available for you to sell into the market can you delve a little more again and what is the CPM lift relative to the rest of the portfolio and then maybe shifting to discovery plus any more early trends you could talk about from a viewing perspective is the proportion of time spent there.
On specific networks of programs consistent with your linear networks and for the content that is premiering on discovery plus are you seeing a lift in subscriptions or impact on linear ratings. Thanks.
Thanks, John.
Well at first the upfront was the best upfront that I've seen in my career.
On average it was up about 20, and and we were able to beat that significantly so.
So I think.
I believe we were best to market.
This was a market that was up 20, and we picked up.
We did much better than that and 1 of the reasons is because of the discovery premier and in some ways a great story, but it's 1 that it starts off with the fact that we were.
We're not getting enough and we haven't been getting enough for an CPM for the great content that we have and broadcast is on the <unk>.
And where we have been in the 'twenty and so 1 we made some more progress against the broadcasters, but discovery premiere was in the <unk>.
And so.
For for advertisers to be able to get content that has the same or better reach with the same or better engagement.
In the <unk> for us, it's a dramatic increase but for advertisers.
A significant decrease because instead of buying a broadcaster for $64 to buying us from $45 or $43.47 and so it's a real win win.
And we're able to service.
We have great demos.
And we're able to go not only do we have the premier product, but now we have discovery plus with the engagement on a much younger audience. Since we could put together between linear and discovery plus and go a really compelling package and the result was.
Our most successful upfront and I think it's the fact that.
Ratings are down in the aggregate it is something that we're going to be living with for a long time, but look I've told this story before but in the nineties.
We went up and when I was when I was running the cable growth broadcast was going down.
And advertising rates were going up and.
And while it said that can't continue.
And it continued to the date, it's been going on for 20 years I can't predict that that's what's going to happen, but there's not a lot of great inventory out there inventory is declining and we have some of the best inventory out there and then 1 it's generally under price. So when we get big increases it still looks good but to the overall bouquet of what we're offering.
Now between the young demos on discovery plus ago, and the engagement and the audience that we have on all of our brands on what we can put together.
This real scarcity.
<unk> you have the scatter market, a plus 50 right now.
And there are a lot of there are a lot of others that are under delivering and so they'll be out of sale. So in general when you see the fourth quarter youre going to see a real opportunity, but I talk about visibility.
Because the numbers in terms of the upfront thats going to start in the fourth quarter and it's a good thing because maybe it will be down 15%, but maybe maybe the appetite it looks like the advertising is going to be up dramatically more than that we cant predict whether that will continue but it's right now it's a trend with scarcity.
And the way that our content.
And linear content can deliver on audience for an advertiser the prices are going up and so we hope that continues because it's a it's an offset and that allows us to still grow in linear which is meaningful.
And generally I would say on your question about engagement on discovery plus in content.
It does it does Jon largely on the.
If you follow a lot of our biggest networks, but the genres that certainly in the crime.
Paranormal.
Our home.
The discovery content.
Sure.
A lot of it is sort of traditional or core genres in the linear space also on those that are driving our discovery plus activity in the U S debt is obviously reality.
In the TLC sort of genre also a big driver from us as the spread out and go internationally it becomes a little bit more diverse in the sense that obviously, we have bigger broadcast content in markets like Poland. The Nordics, Italy.
And so we have bigger entertainment formats.
So that are working extremely well and then sports, which we've talked about bolt on tend to be Olympics on outside of the Olympics. So it becomes a slightly more diversified story outside the U S. But.
But in the U S. It is it is driven by a lot of of course on do you think about us for TV.
Okay, let's start with your question. Thanks.
Our next question comes from Jessica Reif Ehrlich with Bank of America Merrill Lynch. Your line is open.
Thank you a couple of questions. There have been cash reports regarding your interest in channel 4 in the U K and it's great that you're still looking at transactions like what you are about to close 1 of the biggest.
But can you talk about M&A priorities are opportunities outside the U S. Can you give us an update on what's going on in Poland.
Inventory perspective, and then finally.
In advertising.
Question for David on the various platforms for your advertisers.
Tracking different advertisers to different platforms.
So let me start and then JBL pass to you.
We can't comment on on.
<unk>.
On channel 4 but I would just say we're focused on 1 thing and 1 thing only.
Closing.
This transaction and putting together this spectacular company's debt is that has global IP leadership in terms of the content that we have local content sports news the best bouquet of of content together with strong leadership at both companies and and both having a really good.
Platform that consumers are engaging with a likely this is.
Our focus is singular closed this deal.
And drive this company as I have said drive the subscription piece create a culture and.
And drive a culture, where we're creative talent wants to come and work to tell their stories, that's our focus.
So we're not going to comment on any other specific transaction.
But I do think that there is a lot of players that are subscale and a lot of them are going to be figuring out over the next couple of years, what they do and.
The good news for US is we think our hand is very very strong.
Ethically and around the world and we'll focus on getting this deal done and taken that hand to market.
And Jessica the only thing I'd add to that 1 is also we take it as a.
We're proud of the fact that unfortunately every time that anything is potentially up for sale. Our NIM gets mentioned because we have obviously had a successful track record of acquiring integrating and then successfully managing.
All sorts of businesses. The reality is oftentimes as David said, particularly these days on our focus is in a different direction right now with the closing of a Warner deal. That's our primary focus so.
In terms of.
On the AD sales.
And then I'll come to pull on again on AD sales, we do see a vast majority of our clients overlapping between linear and digital.
It's a very strong correlation in a number of clients we're doing both.
On Poland look we as we said I think publicly in the past we remain very committed.
To the business, it's a great business that continues to be a growth business and a very healthy business for us. The environment is obviously challenged we're actively talking to all the different constituents and stakeholders to make our case.
And we think it would be very very <unk>.
Economically.
Irrational.
For for the government to try and pass any laws that ultimately will change our position and make the environment way less attractive for foreign investment not just media, but any foreign investment and.
So at the end of the day, we're continuing to work that situation aggressively on all sides.
The U S government the EU have all been very supportive and fully behind us.
We'll keep you posted as that continues to go on.
Thank you.
And your next question comes from Robert Fishman with Moffett Nathan Your line is open.
Good morning, David following up on your earlier comments on timing and what Youre seeing with the Olympics can you share your updated thoughts on how important international sports rights higher for your company, especially as it relates to driving discovery plus subs when the next round of sports rights come due and then for fewer or JP.
Can you update us on how the pay TV ecosystem looked outside of the U S. As it relates to cord cutting and whether you plan to be more aggressive shutting down linear cable networks as discovery plant ramps up.
Yes.
So let me just start by.
With the.
Cord cutting question outside the U S in the aggregate.
With the exception of last quarter.
The period during Covid, where we really group, we're doing as well or better as we've ever done in history.
This past quarter, we were strong is much stronger than we were on overall share than we were in 19 or any other thing before all of those prior years and unlike the us where pricing is so high pricing for entry cable is much lower around the world and so if there is some decline in there was some decline in.
Fewer shifts, but it's it's much more moderated than what it is.
In the U S. JV can speak a little bit more to that and then I will jump in on the sports piece.
Yes, I think again, it's hard to paint it with 1 brush there are.
David said generally broadly we do see some cord shaving.
Both the cord cutting has remained fairly.
Stable.
Nationally. So we don't see the same sort of dynamics as we've seen some on the U S. The cord shaving is really sort of element of some of the higher tier and higher price point.
People churning down to lower tiers in certain markets.
Our.
I'd say more limited than in the higher priced markets like Northern Europe in some cases and then there are markets like.
Brazil for example from a macroeconomic reasons that certainly have seen subscriber decline over.
Over the last few years as the middle class has been squeezed.
But at the same time, we know in the markets like that that video consumption on video viewership is is.
As hungry as ever.
And Thats, where particularly with the launch of discovery plus coming.
At an even more attractive price point than what they would have paid even for a more reasonably priced pay TV package. We're excited to see those subs. They might have left the pay TV bundle over the last few years have a chance to come back to us.
At a more attractively price discovery plus option going forward in terms of shutting cable net like I think Disney has announced.
We still see.
A very healthy business on the pay TV side. The hybrid deals we've talked to you about where we've done deals with existing partners to continued carriage of some of our channels.
At healthy economics, plus launched discovery, plus and so do a kind of 2 per 1 those have been very successful force. So far and we continue to see a lot of opportunity to be able to drive both of those so we don't see necessarily the shutdown scenarios.
But over time, there may be a handful of markets, where we say that maybe worth experiment and but for now we see a healthy ecosystem and healthy partnerships with this hybrid model.
On the sports we're learning I mean, we've we've been at it for now.
Over 4 years. So we have we needed to find a better product than we were going direct to consumer in Europe with individual sports and the good news is we trying different things and we're trying to figure out ultimately the consumer is going to decide how they want it and we're finding that we're having more success when we put the sports together with the entertainment.
With the nonfiction.
But it's early days, it's still only in the third inning. So in a lot of these markets now where we have football where we have cycling and we're putting it all on day plus we're looking on we're trying to get a sense of whats the acceleration of subs.
What happens to the churn.
Right now it looks quite favorable.
We're also anxious to see which ones, where we're not getting an inside look at oil and Warner, but they launched in Latin America and the launch of a lot of very compelling sports like football.
In in in Latin America, what what is their experience. The Olympics has been a really good experience for us we're doing very well with it.
Share is up 30% versus young Chang.
We're finding that the engagement is much higher as I've said and so we don't know yet what the churn is going to be I think it's going to be helped by the fact that we have beijing coming but ultimately when the when these companies come together.
All about the IP menu, we have news what Roseville news play we have sports.
If not the leader with 1 of the leaders on the World in terms of the sports, Jeff Zucker, and John Stankey and Jason got we're able to lock up sports rights in the U S. With some of the best leagues outside of outside of football, which is compelling. So we look at all that and figure out what do we do with it how do we lose.
Offer it.
Is it all pay and some of it 3 is it is it all together in 1 package is it in 2 packages, but the.
Sports I think is is not that different from <unk>.
From Harry Potter, a king Kong or DC comics are a lot of the HBO.
But with the exception of the fact debt.
We don't own most of the sports. So what we've done is we've tried to get long rights for that was sports and be very careful about what we pay for it.
But we will there is a difference in that when you are building. These the franchises that we have whether it's chip and Jo whether it's whether it would see Oprah Winfrey product on whether it's whether it's the whether it's at Warner building D. C you own that forever.
<unk> you have to eventually come back and pay for and so there will be a view over the next several years of how that how important sports is how.
And and what the return is on it but we're very happy with the fact that we have fantastic sports.
Globally.
That will be able to use when this company comes together in the package on where and we're doing very well with sports in Europe, right now Jamie anything to add.
Okay.
Well I think that's exactly right there.
Robert I want to add.
Pete 1 thing that David said on passing it to make sure that everybody has heard us our second quarter. This year.
The second strongest in our history internationally when it comes to actual audience delivery in terms of eyeballs viewership second only to last year's second quarter, which was obviously impacted by the massive COVID-19 spikes. So it is a fundamentally different story.
Internationally versus domestically.
And we're getting better at doing local content in these markets that people love and they want to watch we're gaining share so even though some people may be bailing on linear.
On the linear advertising market is extremely strong our share is growing and we're doing what's very hard where we're programming in these countries in every language and we have teams on the ground that are creating content in language in country and it's paying off.
So next question. Please thank you.
Your next question comes from Ben Swinburne with Morgan Stanley. Your line is open.
Thank you good morning, everybody.
I wanted to ask about the upfront and then also about the streaming subs here in the third quarter.
David obviously, theres tremendous demand for linear TV as we head into the fall season can.
Can you talk a little bit about whether a discovery was able to navigate some on the measurement challenges that Nielsen has created in the past around delivery and make goods.
Do more non Nielsen deals or where do you think thats even cost the company any money.
In the past and maybe it's something we shouldnt be that focused on but I know you've spent a lot of time on it and it seems like the demand side of advertising is strong I'm curious if you could just comment on whether you guys feel like that's a headwind or are you sort of navigate it around it and then on streaming I don't know this is for Gunnar.
David.
The 18 million number I guess capture is probably the Olympic lift you got in it seems like Youre talking about most of your international launches coming in Q4.
Wondering if there's if there's any other headwinds or <unk>, we should be thinking about in the third quarter.
Or if we should think that there probably won't be a lot of growth here in August and September just anything you want to add as we think about Q3. Thank you.
Thanks Ben.
We have a big data big data operation and.
The good news is on discovery plus and on go on our end and to some extent on linear we've been working very aggressively to build our own.
Data and we've been working with the advertisers and that has been extremely helpful. In the end if we could have better data you would see a dramatic increase in the future is the better better data. Unfortunately.
Nielsen is the width.
And.
It's it's.
It's just it's massively disappointing.
That Nielsen can't get its act together and the answer is we have lost money everyone lost money.
It's just.
Youre dealing with a very antiquated delivery system, we are on.
All learned how to get along with it we do it by augmenting it with our own data.
But recently, they've just been wrong.
It's 1 thing if you have an antiquated system and then you augment it but but the antiquated system itself is unreliable and so as an industry. We've got to figure out how to deal with it we're competing with the likes of Google and Facebook, where they have.
They have the best data the cleanest data the most and compare that with this antiquated system. So we continue to.
Work on our own I don't have a lot of hope from Nielsen.
I think somehow it's been distributed just going to have to work our way out of it from a technology perspective and lead them in the dusk, because they just can't they can't get it together.
It's a shame.
On.
And on the streaming subs.
So.
Okay, and 1 thing that we all need to keep in mind that we've said so many times.
Early so that we don't have a full year yet of a normal cadence and that's just important to keep in mind, but what's very clear is that obviously there is a seasonality throughout the year in the summer months as you would expect across video in general are not the strongest.
If you look at the numbers that we have reported we have been able to add 1 million subs on average across across these months, which again I think I'm very pleased with.
And to your point about the Olympics, it's important to keep in mind that there is a certain amount of free trial and those so on $18 million growth number does not include all of the subs that we are gaining on will gain through the Olympics.
I Gotcha good point, thank you both.
And last question please.
Yes.
And your last question comes from Alex <unk> with Jpmorgan. Your line is open.
Hi, Thank you.
2 quick sort of follow up question on.
1 on advertising.
You can turn on the advertising side he's spending.
From an incredibly strong on which you highlighted.
Second quarter.
Do you mind plenty net result, I'm curious, if you're seeing any cracks in the advertising strength.
So far on Q3, just given the doubts bearing and then sort of at least from.
Okay on spike from the pandemic.
And then my follow up.
<unk> just on that.
At night.
Product that you have that Keith how much more.
It's powerful in terms of bringing more revenue is that where you're seeing that higher percentage of growth in terms of at least on that.
Thanks, so much alexia.
We're not seeing any any slowdown at all at this point because of Covid.
In the aggregate by the way as a company. We're now about flat to where we were in 19, which is a big deal. So when we say we're up this percentage of up 5% versus last year, just burst 19 in terms of level setting were about flat.
Or just about flat to 19, which is a good starting point for us now too to strive and drive to accelerate off of that.
The AD light product.
<unk> is extremely strong, but I don't think that we're breaking out.
How our growth sales in the U S in terms of and light versus subscription JV are we breaking that out at this point, we're not we're not.
Only to say that at the end of the day, we're seeing actually still continued healthy growth on both sides on both products.
<unk>.
Not sort of 1 dominant and 1 we're seeing continued growth on both.
Okay. Thank you.
The only thing I may add on the advertising side to state the obvious the comps are obviously going to get tougher as we go into the second half right. So we continue to see a very very robust market robust demand no signs of Covid break, but obviously, we're now comparing to a slightly higher base line.
In 2020, and we also across the market, obviously had a little bit of a tailwind from political advertising as I pointed out earlier. So those are 2 factors to keep in mind.
Okay. Thanks.
Thank you and that concludes today's conference. Thank you for joining discovery incorporated second quarter 2 from 'twenty..1 earnings Conference call you may now disconnect.
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