Q2 2021 Discovery Inc Earnings Call
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The range.
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Ladies and gentlemen, thank you for standing by and welcome to the Discovery incorporated second quarter 2021 earnings Conference call.
This time, all participants are in a listen only mode of that.
The conclusion of the speaker's presentation, there will be a question and answer session. Also please be advised that today's conference is being recorded I would've liked to have the conference over to Mr. Andrey Slaving Executive Vice President Global Investor strategy, Sir you may begin.
Yeah.
Good morning, everyone. Thank you for joining us for discovery of Q2 earnings call. Joining me today are David Zaslav, President and Chief Executive Officer, Gunnar of Eaton sales, 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 the website at Www corporate 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 the 1995. The forward looking statements include comments regarding the company's future business plans prospects of the financial.
Our 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 in providing projections and other forward looking.
Statements the company disclaims any intent or obligation to update for additional information on important factors that could affect these expectations. Please see our form 10-K for the year ended December 31, 2020 of 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 segment.
Beginning with our core of linear business, which continue to accelerate sequentially.
Underscoring the durability of our content categories and the overall strength of our brands.
Simultaneously scaling our global streaming offerings, most importantly discovery plus.
It continues to have strong traction.
Underpinning total next generation revenue growth of 130% year over year.
The $17 million total global paying direct to consumer subscribers at the end of the second quarter.
And $18 million as of today with.
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.
All of the Eurosport player with the stubborn plus has yet to launch.
And 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.
<unk> bye 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.
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 dressed wrapped in the incredibly healthy upfront provide.
Providing us with the level of visibility we have not seen in quite some time.
Jon Steinberg of his team delivered top of peer performance and.
And a record for our company a testament to the programming and brands the viewers love.
And that 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 of great success.
Our unique vehicle the packages first run episodes from our most popular series of networks.
The sales more than doubled.
Over 200 clients are now buying premier.
The enjoy ratings and reach that is equivalent or greater than broadcast prime.
But it is significant CPM discount.
<unk> heard me tower. This is a true win win.
And we keep driving this forward and clients love it.
Moreover, demand per 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.
And with roughly half of the audience base, the discovery plus the non cable households, the Pla.
<unk> 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 the targeting capabilities of our platform with innovative and intelligence solutions and healthy premiums to traditional linear.
Internationally advertising has also come back in the big way driven by a number of key markets such as the UK, Italy, Germany, Poland as well as the number of Latam and APAC markets that resulted in all regions around the globe turning into 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 or not.
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 launch with Comcast in the coming months discovery, plus will also be available to subscribers across their contour television and contour stream player platforms. The.
The coverage plus will also shortly be available on vizio smart cash.
Advancing our rollout of 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 of 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 of 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 are very pleased with the metrics, we look at to evaluate our position within the marketplace consumer acceptance roll to pay the.
Moving time per active subscriber churn monetization and solar.
We provided an early glimpse of 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 as the market matures. 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 we've already doubled our total sub gains from the lack of Olympic games in Pyongyang.
With nearly 3 quarter of the 1 billion minutes of Olympic content streamed up over 18 times versus the last case.
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%.
The outstanding traction with streaming across all markets, notably in the U K, and Italy, which are newly launched markets for discovery plus.
We are very excited about the upcoming Olympic games in Beijing in early 2022.
The net of course, 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.
The which Gunnar JB 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.
David's comments I am very pleased with our operating performance this quarter.
In which both of our traditional core on many of our business alongside of our next generation screening platforms.
Volume to deliver very healthy revenue growth of an impressive free.
Free cash flow conversion.
While the comparisons against last year, the advertising performance of our very favorable we were especially encouraged by the acceleration and sequential improvements. We've enjoyed from every region around the globe and returned to near pre pandemic levels. The U S. Latin America, EMEA and Asia Pacific All turned in the impressive results and of course discovery.
<unk> is providing a nice tailwind to our performance.
Turning to the 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.
Saw strong demand in all key categories, including CPG pharma cosmetics auto retail and home improvement are more than offsetting the softer of viewership across the industry as compared to the peak Covid Q2 of last year.
<unk> were up 50% plus versus last year of upfront and up more than 30% year over year.
Additionally, next generation of 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 of discovery plus also bought the inventory of our goal of TV everywhere offering underscoring the power of integrated audience solutions across of our suite of digital products.
Furthermore, we continue to rollout of new AD products on the recovery path. For example, we recently launched Greenlight and add product that allows clients to all of the first at the every user of the salary plus on a specific day.
As noted earlier the strength of the upfront market underpins the continued relevance and importance of TV advertising media contributing to greater confidence in our ability to drive topline advertising revenue growth.
While we faced comparisons against political advertising of the second half of the year and some modest headwinds from the Olympics here in the U S. In Q3 layering in the tailwind from this upfront you should've George sequentially faster revenue growth from Q4 over Q3.
Distribution revenues grew 12% year over year.
On a reported basis or 18% of like Pike, primarily driven by continued traction of monetization of the discovery plus subscriber base helped by many of the affiliate pricing offsetting the year over year declining pay TV subscribers.
Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio of subscribers were down 7%.
However, recall that we sold great American country during the quarter when adjusted for the sale total portfolios of Starbucks 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 the new holes in the coming months and you should expect to see our linear subscriber trends more in line with the industry going forward as we have the stockpile.
Worth noting also is that the sale of GIC did result in the modest headwind to both reported advertising net distribution revenue this quarter as we did not recognize any contribution from imports most of Florida.
Turning to the international segment, which I will as always this kind of an ex FX basis.
Advertising revenue of 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.
Noted there were no material new market launches during the quarter. This was partially offset by lower linear celebrates in certain European markets.
Total company operating expense increased 33% during the quarter cost of revenues increased 25% year over year of sports returned to a more normalized schedule of this versus virtually no sports last year, the COVID-19 related shutdowns.
As well as the continuing investment in the <unk> concept.
SG&A increased 43% versus the prior year as we invested in marketing of personnel to support our discovery plus rollout.
We continue to focus on driving efficiency in our core of linear networks and we remain on track to reduce core many of opex in 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 in the first quarter benefiting from both strong next generation revenue growth as well as more efficient marketing expense primarily in the U S.
Q2 next generation revenue growth of 130% annualized at the 1.6 billion run rate and we expect additional sequential quarterly revenue growth for the year and beyond.
As we launch of 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 of this past quarter, mainly driven by content and marketing costs.
We continue to expect net 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 the associated early promotional activity is offset by our strong and growing U S, which is nicely supported by the advice of the salary plus products.
Relative to pay still remains high at an average of close to 80% across the globe the seed portfolio.
As of the average engagement per subscriber, which is more or less of 9 with what we saw last quarter.
As well we remain pleased with overall term, which naturally is at the lower end from the most of the choice of cyber cohorts of skews higher for the most of the supply.
As I noted the vast majority of our international discovery plus 12, thus far has come from existing markets.
And we plan to launch of the number of key markets and territories. During the second half of this year, including Brazil, Canada and the Philippines.
Alongside the additional bonus hallmark.
The Netherlands, and Spain around the end of the year.
It is worth highlighting for the handful of these market launches have been extended out the bottom bought or sold later than our original internal plan call for primarily resulting from the electric of harmonization of our technology platforms. The added benefit of which will enable us to roll out of the international outlet product.
This has been the having the particularly given the <unk> constraints related to Covid and all of our tech hubs primarily in India.
Other puts and takes the consider will be our ability to maintain and keep subscribers that come in during the Olympic games total the initial Walt the pay numbers look very encouraging.
Net net we remain very excited about our local go to market strategies across the important countries through the end of the year.
Turning to housekeeping items net income for the quarter was $672 million or $1 <unk> per share on the diluted basis.
First please note we recognized a <unk> <unk> per share gain on the sale of great American country as well as the 9 cents per share of non cash gain on an existing investment in share for 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 the mid teens range.
For cash taxes, we are now anticipating the slightly higher rate of the high 20% range for the year, excluding PPA amortization.
As we are positioning our tax footprint for optimal outcomes across the number of legislative scenarios for 'twenty 2 and beyond.
Third and finally, the PPA impact was 30 per cent per share.
The adjusted for the above EPS would have been <unk> 89 per diluted share.
Now turning to free cash flow and our leverage we generated $757 million of free cash flow in the quarter, representing a near 70% conversion rate of annual EBITDA notwithstanding the <unk>.
The investments, we're making as 1 of the returned 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 EBITDA without the free cash flow this year, even with the anticipated new market launches and slightly higher cash taxes mentioned earlier.
At the end of the quarter, our net leverage was 3 in the 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 the $175 million to $200 million of AOS losses during the third quarter as the 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 announce of our transaction with Warner Media, we did not repurchase any shares during the quarter as we continued to invest in our next generation of initiatives and conserve cash ahead of the closing of the deal.
And finally, we now expect FX to have roughly of positive $100 million year over year impact on revenue and the negative $20 million impact on EBITDA in 2021.
We continue to operate on solid footing dynamically growing our direct to consumer business. The contributions to our top line growth, becoming increasingly meaningful and optimizing the resilient core of linear of 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 and shareholder value and we are eager and excited.
Once we gain all of the requisite approvals per roll up our sleeves. The capture the tremendous opportunities offered by our proposed merger with Warner Media.
And of course, we look forward to speaking with you at the appropriate time on all of our thoughts and plans around integration strategic direction synergy et cetera. The VAT.
I'd like to turn it back to the operator to take your questions.
Ladies and gentlemen, as a reminder to ask the question you will need to press star 1 on your telephone to withdraw your question from the County you. Your first question comes from.
Morale with RBC capital markets. Your line is 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 of these of particularly big broadband and mobile market I'd be curious.
Which 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 I think there is some concern that we might see some churn pickup with some of these.
Distribution partnerships and that had fixed.
Promos and then just lastly, I know, it's early but any thoughts on the international rollout looking between 22. Thank you.
I think so.
So.
We have as you noted we have the markets, we've announced that we'll be rolling out 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 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 the so you should expect sort of fairly consistent to what our historical precedent has been some strong partnerships in and of few of those markets that we rollout and so we feel good about that I think is buena touched on in his comments.
We are the ones that are sort of leaning towards more sort of September and into the fourth quarter, where.
Where we had hoped obviously to be slightly more ahead of that into the into.
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 some of that will hit a little bit later in the second half of the year than we did.
Initially thought.
And in that time period, I think we.
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.
It relates to the 22 I think it's a little bit early to talk about that the only comment.
David in the intermediate amplifiers, obviously as we get later into 'twenty 2 point of view when we get further visibility on the timing of the Warner media deal.
We obviously will look at making sure we stay smart in the context of when that timing and when that deal might close to how we maximize the rollout schedule of.
Those services into 2022 so.
That's I think as much as an argument or David if you want to add anything else such as much of this to add.
The the execution on the Olympics was.
Really almost flow of 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 of 18 times what it was before.
And per 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 from people that are you able to find the products that they want particularly with the complicated.
Product like the Olympics, and it's really working we will have.
<unk> 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.
The 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. The C..3.
And so there may be of real strategic opportunity for US here, we're doing extremely well and packaging that product together with linear.
Together with with a body of here in the U S and so whereas the year ago, we thought everything would just be subscription we're looking at.
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 in the U S and so doing that requires more engineering more coding, but we want to get it right and as Jamie 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.
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 newcomer.
And maybe 1 thing that I would like to add.
Your question on churn and so that continues to track very nicely ahead of our plans.
And most importantly roll to pay is also very stable as I said, the 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.
The 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 Cahall with Wells Fargo. Your line is open.
Thanks, once a day to day and 1 for David.
So the cost of points, suggesting that you might have made some comments at Sun Valley about the merger, maybe timing and further industry consolidation for those of US as 1 of the budgets of conferences I was wondering if you could just maybe expand on some of those comments in the public Forum.
And then.
I think the reiterated being the peak investment this year in terms of the annual EBITDA drag of Nextgen as you think about the.
Most of the with 1 of the media and the DTC services I know spending on content remains pretty cycling. The when you think about the others.
For the truck.
She might decelerate, because youre going to be combining all of these systems at some future point, then and conductivity of any upside to maybe the 5 times leverage target when he calls thank you.
Thanks Steven.
Well, let me first speak to the merger timing I was in D. C last week.
Net with across the board spent the full day.
Yes.
Broad support from this transaction, we haven't heard any pushback, we haven't seen any push couple of pushback.
This becomes a very strong company for consumers.
A more compelling strength.
<unk>.
And so right now it feels to us on every level like.
We've seen green light, we're not seeing any yellow lights of 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 are working very effectively with us the AT&T team and John John has a terrific team that's working with our team but.
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.
If the put together a great library of our great menu of content of our IP that.
That is the that is the most difficult thing to do yes, we need of strategy for what the price is as it added of the sedan in light of exactly how do you go to market in each country, but the toughest thing to do is come up with the 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 announcements of.
The risks with his phone via almost $1 billion for that basket of content 8 almost $9 billion from the basket of content that the.
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 of the city coming back.
<unk> friends reunions.
Space Cam, having a big week, the big weak against the against the Marvel properties and so.
Which toby put together.
And Jason they're sitting on top of.
Just kind of 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 of our churn is very low.
Have great nourishment and.
The the combination.
Of Harry Potter King Kong, Batman together with all of them with all of our great nourished in content globally and 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 the what we have is not only of we do we have I think the strongest set of IP, but we have the broadest global.
Yes.
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.
The Bellevue 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.
Disney of Netflix have have gotten across the lake.
And we think that this will be the 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 of 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 we are.
Yes.
Okay, and Steven let me take the other question on peak investment.
Again as said, we are reiterating debt that expectation of 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.
The tracking of an annual run rate of $1.6 billion Nextgen revenue is now.
The significant step down in our startup losses from our investment initiatives overall, so as of now.
Some of what 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.
We get some nice profitability out of streaming.
Apparently lower.
All of our numbers in the us.
Earlier.
The second part of your question HBO Max.
I had 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 the consumer that diminish.
Dementia megawatts.
Position here.
And again from that perspective, while I don't want to give an update on that 5 times leverage leverage expectation right now again.
Again, I view that as of yet as a non issue we have a ton of confidence that we will see a very very quickly get to where we need to be.
The next question.
And your next question comes from Doug.
Mitchelson with credit Suisse. Your line is open.
Thanks, so much.
Couple of questions. If you don't mind.
SG&A was down quarter over quarter of the United States, and you mentioned coming off of launch marketing or more efficient marketing is this <unk> level of sort of a good SG&A level that we should expect to continue.
J D.
And David as well.
Jimmy 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, if you think about pricing for the service so you're better off pricing at a premium for super fans or pricing low and trying to drive of the services broadly as possible.
Thank you.
So 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 of much earlier in the prepared remarks, I view, the sort of $250 million roughly give or take a level of investment losses as a poll the 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.
Continue making those investments.
Rolling product with again, a very very strong long term value proposition. So you should see the general trend of expense is growing.
But very much in line and then the overtime slower than the revenue side.
Yes.
The in terms of.
Our all in mission.
Our all in admission.
I kind of get into how we're going to price in each market at this point because it wouldn't be appropriate when I kind of 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 we're going country to country, we're actually trying some different things so that we can learn more.
We're watching the great success that debt.
John and Anne is having them as they accelerate but.
We're focused on $200 million global subscribers. This is not about niche.
This is about global subscribers and <unk>.
For me after we close the steel 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 and.
With the product that's easy to navigate of news 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 the the left side of the right side is.
Yes.
Focus on having the best Creative company in the World and Warner Brothers has been the greatest creative company in the world. The placement of the talent want to come the place where they feel nourished and supported and that's the history of Warner Brothers and most of the great content that.
Debt I've seen that we've all seen we don't even realize it in the end, we see that Warner Brothers Shield and it stands for something that stands for great storytelling and we are 1 of it may be the only company debt.
Has the ability to.
Focused only on that 1 thing we're not in the phone business. When this deal closes were not in the retail business. We're not in the cloud business will not only the broadband and the cable business and so that's the focus and that singular focus I think will drive a great culture.
The people that they care about content that love content debt.
So 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 the movie everywhere in the world as well or better maybe the 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. It's 1 of the greatest writers producers and creative talent came in when you look up at the Big screen, That's where stars of made and that's where the magic happens and so 200 million subscribers a great team, putting these companies together to drive towards that kind of great creative culture with.
At the very top of motion picture business that'll be 100 years old in 2 years and it has the heritage of <unk>.
Of all of the great storytelling that we all grew up with that's the company and that's what we're going to drive growth.
Greg If you want me just 1 day I can say on the current pricing to your question of discovery plus.
I will say that what we've seen so far as the.
The 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.
Plus market so far.
Across some of our biggest territories. So we feel that it's not necessarily the question of growing high price smaller or low price.
The.
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.
The price range.
And that that scaling very nicely now again part of the talk about the globe in 1.
Because ultimately markets, where we have more premium sports, we will price higher markets, where we don't.
And that have lower price.
The sensitivities like Latam or Asia will price lower.
But generally we feel like we can actually hit of very attractive price point much higher than our wholesale pricing today and still be.
In a sweet spot that ultimately deliver scale at the same time.
Right Alright. Thank you for the next question.
So the next question.
Your next question comes from John gain of things lead.
With Wolfe Research your line is open.
Hi, Thank you.
Maybe if 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 double or 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 of viewing perspective is the proportion of time spent there.
On specific networks of programs.
Insistent with your linear networks and for the content Thats premiering on discovery plus are you seeing a lift in subscriptions or impact on linear ratings. Thanks.
Thanks, John.
The 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 I think.
I believe we were best of 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 premiere and in some ways of the great story, but it's 1 that it starts off with the fact that we were not getting enough and we haven't been getting enough for an CPM for the great content that we have and broadcast is in 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 appetizers.
A significant decrease because of instead of buying of broadcaster for $64, you're buying off of $45 of $43.47 and so it's a real win win.
And we're able to service.
Of great demos.
And we're able to 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 of is something that we're going to be living with for a long time, but look I've told the story before but in the nineties.
We went up and when I was when I was running the cable group 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 off of 20 years, I can't predict and Thats whats kind of happen, but theres 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 of discovery plus ago, and the engagement and the audience that we have on all of our brands and what we can put together.
This real scarcity.
The you have the scatter market of plus 50 right now.
And there are a lot of there are a lot of others that are under delivering and so there'll be out of sales. So in general when you see the fourth quarter youre going to see a real opportunity, but I talk about visibility.
Does 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 of 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 the trend with the scarcity.
And the way the our content.
And linear content can deliver an audience from an advertising the prices are going up and so we hope that continues because it's the it's an offset and that allows us to still grow in linear which is meaningful.
And generally I would say the your question about engagement on discovery plus in content.
It does it does Jon largely on the.
The follow a lot of our biggest networks, but the the genres of certainly in the crime.
Paranormal of home.
Home.
The discovery content.
A lot of it is sort of traditional or core genres in the linear space also are all of those that are driving our discovery plus activity in the U S debt is obviously reality.
In the TLC sort of genre and also a big driver from us as the spread out and go internationally it becomes a little bit more diverse in the sense of obviously, we have bigger broadcast content in the markets like Poland. The Nordics, Italy.
And so we have bigger entertainment formats also that are working extremely well and then sports, which we've talked about both in terms of the Olympics and outside of the Olympics. So it becomes of slightly more diversified story outside the U S.
But in the U S. It is it is driven by a lot of the core John do you think about us for TV.
Okay.
Thanks.
Your next question comes from Jessica Reif Ehrlich with Bank of America Merrill Lynch. Your line is open.
Thank you couple of questions dividend cash reports regarding your interest in channel 4 in the U K.
It's great that you're still looking at transactions like while you are of basketball is 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.
From your perspective, and then finally.
In advertising.
Much crossover is there on the various platforms for your advertisers.
Tracking different advertisers to different platforms.
But let me start and the JBL passed the U.
We can't comment on.
<unk>.
Non channel 4 but I would just say we're focused on 1 thing and 1 thing the only.
Closing the.
This transaction and putting together the 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 of both companies and both having a really good.
Platform that consumers are engaging with the unlikely this is the.
Our focus is sales.
<unk> closed the steel and drive this company as I have said drive the subscription piece create a culture.
And drive a culture, where we're creative talent wants to come and work the countless 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.
That's the clean 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 the.
We're proud of the fact that unfortunately every time that anything is potentially up for sale R&M gets mentioned because we have obviously out of successful track record of of acquiring integrating and then successfully managing.
All sorts of businesses. The reality is oftentimes as David said, particularly these days of our focus is in a different direction right now with the closing of the Warner deal that's our primary focus.
In terms of.
The.
Of the AD sales.
Current and then I'll come to pull and 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've said I think publicly in the past we remained 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 of the different constituents and stakeholders to make our case.
And and we we think you'd be very very <unk>.
Economically.
Irrational.
For for the government to try and pass any more of 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 most of it Nathan Your line is open.
Good morning.
David following up on your earlier comments and tying 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 <unk>.
Sports rights come due and then for fewer or of JP can you update us on how the pay TV ecosystem looks outside of the U S. As it relates to cord cutting and whether you plan to the more aggressive shutting down linear cable networks as discovery plant ramps up.
For the let me just start by.
With.
The cord cutting question outside the U S in the aggregate.
With the exception of last quarter.
The the period during the Covid, where we really growth, we're doing as well of better as we've ever done in history.
This past quarter, we were strong is much stronger than we were in overall share. Then we were of 19 or any of the Singapore grew 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 the risk some decline in.
<unk> of our shifts, but it's it's much more moderated than what it is in.
In the U S. J D can speak a little bit more of that and then I will jump in on the sports piece.
Yes, I think again, it's hard to paint all with 1 brush there are as David said generally broadly we do see some cord shaving.
But the cord cutting has remained fairly.
Stable.
Internationally. So we don't see the same sort of dynamics as we've seen some in the U S. The cord shaving is really sort of element of some.
Some of the higher tier and higher price point.
People churning down to lower tiers in certain markets, but those are.
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 or.
Over the last few years of the Middle class has been squeezed.
But at the same time, we know in the markets like that the video consumption of video viewership is as is.
As the hungry as ever.
And Thats, where particularly with the launch of discovery plus coming.
<unk>.
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.
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. The continued carriage of some of our channels at.
And healthy economics bus launched discovery, plus and so do a kind of 2 per 1 of 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 in the for now we see of healthy ecosystem and help the 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 together.
With the non fiction.
But it's early days, it's still only the third inning. So in the 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 and 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 1 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.
Merica, what what is their experience the Olympics is bit of 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 of Beijing coming but ultimately when the when when these companies come together.
All of about the IP menu, we have news what role the newest play we of sports.
If not the leader with 1 of the leaders of the World in terms of the sports, Jeff Zucker, and John Stankey and Jason got we're able to lock up the 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 of that and figure out what do we do with it how do we will.
Offer it.
Is it all pay and some of it 3 is the is it all together.
Together in 1 package is it in 2 packages, but its the the.
The sports I think is is not that different from <unk>.
From Harry Potter of King Kong or DC Comics are a lot of the HBO.
But with the exception of the fact that we.
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 the difference in that when you are building the.
The franchises that we have whether it's chip and Jo whether it's whether it's the Oprah Winfrey product of whether it's whether it's the whether it's at Warner building D. C you own that forever.
<unk> of 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.
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 and we are and we're doing very well with sports in Europe, right now Jamie anything to add.
Okay.
I think thats exactly right there.
Robert I want to add the.
Pete 1 thing that David said in passing it to make sure that everybody has heard of 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.
All of it 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 out of linear.
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 of creating content in language in country and it's paying off.
The 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 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 of discovery was able to navigate some of the measurement of challenges that Nielsen has created in the past around delivery and make goods.
Able to 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 the demand side of advertising of strong I'm curious if you could just comment on whether you guys feel like that's the headwind 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 I'm. Just wondering if there's if there's any other headwinds or <unk>, we should be thinking of that in the third quarter or if we should think that probably won't be a lot of growth here in August and September.
Tampa 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 of non go on our end.
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.
The Nielsen is the width.
<unk>.
It's it's.
It's just it's massively disappointing.
Debt 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've all learned how do you 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 the but the antiquated system itself is unreliable and so as an industry. We've got to figure out how to deal with it the competing with the likes of Google and Facebook, where they have.
They have the best data the cleanest data the most and you compare that with the antiquated systems. So we continue to work.
The work on our own I don't have a lot of hope from Nielsen.
No.
I think somehow it's been distributed just kind of have the work our way out of it from the technology perspective and lead them in the dusk because theyre just they just can't they can't get it together.
Got it.
It's a shame.
Okay.
On the and I'm, assuming some spend so.
Okay, and 1 thing that we all need to keep in mind that we've said so many times, it's very early still but 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 the video in general are not the strongest.
And if you look at the numbers that we have reported the we've been able to add 1 million subs on average across across these moms, 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 also our $80 million number does not include all of the subs that we are gaining of will gain.
Through the Olympics.
I gotcha okay.
Thank you both.
And last question please.
And your last question comes from Alex here, what's the run with Jpmorgan. Your line is open.
Hi, Thank you.
2 quick sort of follow up questions.
1 on advertising.
Can you kind of on the advertising side he's.
<unk> been incredibly strong average you highlighted the fact.
The second quarter.
Do you mind kind of in your results I'm curious, if you're seeing any cracks in the advertising strength and so far in Q3, just given the doubts bearing and then sort of the.
Churn spike from the pandemic and then my follow up of.
The question really just on the <unk>.
Mike.
You have the key how much more.
The profit profile in terms of bringing more revenue, Inc, and that where you're seeing the higher percentage of growth in terms of is that bad.
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 at the company. We're now about flat to where we were in 19, which is the big deal. So when we say we're up this percent 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.
Due 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 AD light versus subscription JV of re breaking that out at this point.
We're not.
The only to say that at the end of the day, we're seeing actually still continued healthy growth on both sides on both products.
No.
It's 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 the.
The comps are obviously, you kind of get tougher as we go into the second half right. So we continue to see of very very robust market of robust demand.
All of signs of Covid break, but obviously we're now.
<unk> slightly higher baseline.
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 2021 earnings Conference call you may now disconnect.
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