Q3 2021 Discovery Inc Earnings Call
Year and the years ahead.
I am very pleased with our focused performance and strong operating discipline as we simultaneously ramp up our integration planning strategic reviews and approach ahead of the Warner media merger.
We are increasingly enthused about the transformative opportunity ahead by bringing together these complementary assets.
<unk> creative leaders and employees all around the globe.
This morning, I'll provide some brief commentary on Q3 operating performance and update you on the progress we are making as we work towards the close of our transaction and integration of the businesses.
Gunnar will then take you through additional puts and takes on the quarter.
Very briefly on Q3.
It was a solid quarter all around.
Subscriber growth for our direct to consumer platforms picked up nicely post summer and we added a healthy 3 million paying subscribers around the globe.
Reaching a total of 20 million subscribers and we've seen continued growth thus far in Q4.
We were able to deliver this growth as well as driving double digit growth in both advertising and distribution revenues, while converting a healthy amount of OIBDA to free cash flow.
This positions us nicely above our guidance of at least 50% conversion this year.
And we see free cash flow is tracking to exceed.
$2 1 billion for the full year.
And that's after funding very significant investments in our discovery plus rollout.
Additionally.
And importantly, we have had the opportunity to refine some of our transaction leverage assumptions after examining Warner media is draft carve out financials.
Though we took a conservative approach initially while modeling the pro forma transaction.
We now expect our net leverage at close to be at or below four five times versus the five times that we noted in may.
And we are currently tracking below the four five.
This is predominantly based on estimated contractual adjustments to working capital.
And to a lesser extent, an improved outlook in our operating performance.
Accordingly, we now see a path to reducing leverage to around three times meaningfully sooner than what we articulated in may.
More on this shortly from Gunnar.
But at this points to a stronger financial footing than we had anticipated as we stand up the merged company and.
And accelerate the pace to Delever.
Supporting our ability to make focused investments in growth initiatives.
Even without any asset sales.
On the regulatory front.
Echoing John Stankey his comments on the AT&T call.
We are well on track for a mid 2020 to close and are engaged in the typical regulatory filing process and jurisdictions around the globe.
Including our planned filing with the SEC a preliminary draft of our merger proxy expected out in late November.
The transformative upside from the merger is of course, the global direct to consumer opportunity.
And while we appreciate some of the questions that a number of you have asked regarding clarity in specifics regarding the product investment and go to market roadmap.
It is still premature for us to provide details given where we are in the ongoing regulatory review process.
That said.
Having conducted further operational and strategic diligence.
I can share with you some broad strokes around what underpins our confidence and enthusiasm in our global go to market attack plan.
First.
It's all about the content.
From the start under one roof will be a combination of two companies, whose common culture of creative excellence.
Connick characters and franchises will result in a differentiated competitive offering.
I believe the biggest and most compelling menu of IP for consumers in the world.
Spanning comedy to true crime kids and family lifestyle to adventure drama to documentaries.
<unk> and sports and of course, SIFI and superheroes.
I believe the most complete and balanced portfolio offered in one service in the world.
And secondly, we view, our ability and commitment to tactically invest in our content portfolio as a critical strategic driver building upon our respective long tenured track records are producing relevant and complementary programming around the globe.
This should help to make our service uniquely global and local at the same time.
Third given the breadth of our content offering we expect the combined service will appeal broadly to all demographics young and old.
With strong male and female genres again, very complementary such that our global total addressable market should be on par with the biggest streaming service.
Assessing the overlap in respective subscriber basis at least here in the U S. We believe less than half of discovery plus subscribers are also HBO Max subscribers.
Which with the right packaging provides a real opportunity to broaden the base of our combined offering.
And with our global appeal infrastructure on local market capabilities. Our international roadmap is very much still untapped and provides meaningful upside over the coming years.
Lastly, our ability to drive revenue and <unk> positions us well for long term growth, particularly.
Particularly given our plans to market with a lower priced AD light service starting off in the U S and later in key international markets.
A meaningful distinction from some competitors will we see an opportunity to drive value.
We gain confidence in the strategic direction from our experience with AD monetization on discovery plus in the U S, where advertisers covet, the incremental reach demos target ability and product flexibility and paid premium rates to address this audience, helping make this year.
Highest <unk> offering.
The opportunity to scale and add light offering represents one of the most significant upside drivers for the company long term.
While offering a compelling value to more price sensitive consumers and will benefit from discoveries depth and local AD sales infrastructure.
And teams around the world to help monetize it.
It's quite clear that the winners in streaming are and will be those companies that can provide consumers with the best quality stories, the most appealing content choices.
Personally and simple products and all at a great value.
We expect our highly complementary combination will drive such a winning value proposition.
And we will be reflected across key operating metrics over time.
A few words on the linear side of the house before turning over to Gunnar.
As we think about what can be achieved in terms of bringing great networks and brands together under one roof.
The analog to Scripps is a valuable benchmark and.
And we believe the opportunity is far greater here, both on costs and advertising revenue potential.
Ultimately to better support our core linear business and more broadly the entire traditional ecosystem.
This I believe is one of the least depreciated elements of this transaction.
Consider with scripts the platform, we created and aggregating female demos.
The bedrock on which we launched premier.
Our product that offers advertisers the undo located reach of our broadcast network across all of our primetime originals at significantly more efficiency pms than broadcast.
We can take that advertising platform to the next level by weaving in sports scripted news and male oriented programming together with our existing core competencies.
True win win.
Generating significant revenue upside to us with improved options efficiency and savings to our advertising partners by replicating the reach of our broadcast network at better value.
Cost synergy opportunities are significant.
We draw upon the expertise of our transformation office, which since our merger with Scripps networks in 2018 continuously challenges our management team and me to refine and transform how we conduct and manage our organization from top to bottom around the globe.
Nothing is sacred and no stone unturned.
With Scripps, we ultimately captured more than $1 billion in cost savings representing about 35% of all non content expenses.
And about three times, our original synergy target before we stopped attributing incremental savings to the merger.
A large chunk of the cost synergy opportunity that we have already conveyed speaks to the best practices and tailwind in place from the integration of Scripps.
It's a great starting point.
As we refine and integrate global ops enterprise Tech corporate functions real estate.
Direct to consumer infrastructure and tech.
And streamline efforts across duplicative functions like SG&A and marketing spend.
Process that we see broken down into three distinct waves over the next few years.
We approach $3 billion in cost saves.
Tangible and achievable goal, especially against the combined company that should spend around $35 billion this year and.
And growing from there.
Stepping back for a moment to reflect on our direct to consumer pivot <unk>.
During a year since discovery plus launched I'm proud of what we've accomplished under the leadership of JV and the World class team, we have assembled over the last few years.
We continue to learn a great deal challenge ourselves.
Sharpening, our focus and gaining perspective for the next leg of our direct to consumer journey with Warner Media and HBO.
And as we've noted recently, we continue to refine our discovery plus plans, taking a more thoughtful and tactical approach to investing in the product.
And doing so in ways that also support our plans for the combined company. After we close the transaction.
For example, we are moving forward in priority markets, such as Canada, Italy, Brazil, and the U K.
Some of which are where HBO Max hasn't announced plans or in some cases has indicated that they cannot launch in the near to medium term for contractual reasons.
As you heard from John Jason and the team on their earnings call.
<unk> continues to aggressively move forward with their global expansion plans, most recently in Latam and last week in Europe.
And we look forward to closing the transaction so that we can coordinate and maximize our marketing technology and content spend for the enhancement of the combined effort.
Until such time, we continue to rollout new and exciting content to entertain a sustained our subscribers around the globe.
And our metrics look great.
Roll to pay remains near 75% globally.
Churn, particularly in the U S to continues to look strong and approaching peer group lows.
While app store ratings are firmly at the top.
While monetization and engagement continued to exceed our expectations.
All of which helps to solidify our discovery plus base.
As we endeavor to roll into and formulate a more comprehensive and broader offering.
With HBO Max.
In closing.
This is an exciting and dynamic time for us as we plan on next steps and.
And we are as eager to share them as we know you are to hear them.
And we expect that will be in short order.
While the opportunity of course capture.
And enhanced efficiency as both tangible and material.
Our north Star.
Our right to play will be in achieving long term sustainable financial growth, resulting from the combination of these two great content companies.
Helping to nurture our important linear presence.
While driving global scale across our direct to consumer platform.
Anchored by his rich and relevant a portfolio of creative franchises.
Anywhere in the world.
I would now like to turn it over to Gunnar.
After which J b, Gunnar and I will be happy to answer any of your questions.
Thank you David good morning.
Everyone. Thank you for joining us today.
Reiterating David's comments I am pleased with what the discovery team has achieved since the discovery plus analyst day, not even a year ago.
Over that time, we've added 15 million paying direct to consumer subscribers globally, finishing the third quarter with 20 million paying subscribers.
Since the start of our discovery plus journey, we have launched in over 25, new markets, notably the U S and the U K and most recently, Canada and the Philippines with Brazil to come over the next few weeks.
At the same time, we have continued to drive growth in markets like Poland, The Nordics, Italy, and India, while we double down on our direct to consumer efforts with a renewed and expanded content offerings.
And our next generation revenues finished the third quarter with $425 million for the quarter or a $1 7 billion annualized run rate with global DTC ARPA of approximately $5 and $7 blended discovery plus <unk> in the U S.
Supported by our over $10 <unk> for the discovery plus add light product, which continues to monetize very well.
Investment losses for the quarter were in the low $200 million range slightly better than our guidance from last quarter, and we expect the investment losses more or less in that range in the fourth quarter as well.
As always we maintain a disciplined approach with respect to investing in direct to consumer initiatives as both David and I have noted over the last few months.
This lens that we view the opportunity ahead, both leading up to the merger and beyond we are.
We're very focused on nursing, our existing subscriber base with an increasing content offering a new product features at the same time, you should expect us to be guided by a rigorous analysis of customer lifetime value subscriber acquisition cost to determine our marketing spend for new sub editions.
And now I'd like to quickly review, our reporting segments, starting with the U S third quarter advertising revenues increased 5% year over year pricing was healthy versus last year, driven by scatter pricing that was up 40% year over year.
Additionally, we continue to see strong demand for our discovery plus add light product, which contributed to the growth in the quarter. This was partly offset by weaker audience deliver a year over year some of it attributable to the Nielsen panel issue as.
Whereas the lapping of our very strong performance last year during the pandemic.
Furthermore, some of our networks of loss share for a strong sports calendar this year.
While scatter pricing is still very healthy in Q4 up 30% to 35% of our both upfront and last year. The overall tone in the market is a bit more subdued than last few quarters as clients work through the constraints in our global supply chain.
And though there is slightly less visibility as a result, we are very pleased with how our portfolio is positioned based on the strength from the upfront and contribution from direct to consumer.
Distribution revenues increased 21% year over year, largely due to the continued growth of discovery plus as well as linear affiliate rate increases in part helped by successful renewals with Directv Verizon and <unk>. So far this year.
As disclosed in our earnings release pay TV subscribers to our fully distributed linear networks declined by 3% year over year, while total portfolio linear subscribers declined 4%, excluding the impact of the sale of our great American country network last quarter.
Turning to international which I will as always discussed on a constant currency basis international advertising increased 26% versus last year as the global advertising marketplace continued to recover from the pandemic.
We also benefited from the Olympics in Europe across our linear and digital platform. Although as we've noted in the past advertising for the Olympic games is less consequential in Europe as compared to the U S.
All of our international regions, including many of our key markets like the U K, Germany, Sweden, Norway, Spain, Australia, and New Zealand, and Mexico were up meaningfully compared to last year as well as compared to 2019.
See momentum continuing into Q4, even as needless to say the year over year comps get tougher from here on out.
International distribution revenues grew 6% during the quarter, primarily due to the growth of direct to consumer subscribers, which have nearly tripled over the past year across our footprint outside the U S. In part aided by Olympics items.
Turning to operating expenses total company Opex increased 50% during the quarter or 17%, excluding the Olympics, which the overall <unk> losses were in line with our guidance of around $200 million for the quarter.
We continue to focus on driving efficiency in our core linear networks and we remain on track to reduce core linear opex in the low to mid single digit percentage range for the year.
Turning to some housekeeping items net income for the quarter was $156 million or 24 per share on a diluted basis. A couple of items to note first we recognized a <unk> 12 per share noncash gain from the $15 billion of notional interest rate hedges that we recently implemented to mitigate interest rate risk for future.
Insurances to finance the cash portion of the Warner Media transaction.
The hedges provide additional security and visibility towards our overall cost of deal related debt financing, which is now trending better than our initial expectations.
And a final note on this as the derivatives do not qualify as hedges for accounting purposes. We are required to report the changes in fair market value on our income statement, which could result in some additional variability to our net income until the Warner media transaction closes we will of course call this impact out each quarter.
The impact of PPA amortization during the third quarter was <unk> 30 per share adjusted for the above EPS would've been 42 per diluted share.
Our effective tax rate during the quarter was 15% and we continue to expect our full year effective book tax rate to be in the mid teens range for cash taxes, we continue to anticipate a rate in the high 20% range for the year, excluding PPA amortization, though this is subject to change as we are carefully monitoring ongoing tax legislation.
And we expect FX to have roughly a negative $15 million year over year impact on revenues and a negative $10 million impact on EBITDA in the fourth quarter.
Now turning to free cash flow and our leverage we generated $705 million of free cash flow in the quarter, obviously, a very strong conversion rate of EBITDA notwithstanding the continuing investments, we're making as well as the return to normalized content production levels year to date, our EBITDA to free cash flow conversion rate is over 60%.
And with a few months left in the quarter, we see free cash flow topping $2 1 billion for the full year and clearly ahead of our 50% conversion guidance.
And to expand on the point that David made earlier, we now expect our net leverage to be at or below four five times by the time, we closed the Warner media merger.
Over the past few months, having had the opportunity to dig further into Warner media is draft carve out financials and with better visibility on estimated working capital in conjunction with our better P&L and free cash flow performance. We now believe that we will have a healthy amount less net debt at closing than originally anticipated.
Naturally these metrics are preliminary and the function of working capital of close we now do expect to be in a position to reduce leverage to three times meaningfully sooner than what we stated in may.
Our long term target net leverage range for Warner Brothers Discovery remains at two five to three times as we work towards closing the Warner Media transaction in mid 2022, we have redirected our experienced integration and transformation office to hit the ground running.
And as we refine our strategic review and integration plans and as we develop our synergy capture plans further we are as enthusiastic as ever about the prospects of combining these two world class portfolios and franchises with that we look forward to sharing a lot more in due time and for now I would like to turn the call over to the operator to start taking your questions.
Thank you, Sir and we will now begin the question and answer session. As a reminder, if you wish to ask a question simply press Star then the number one on your telephone keypad. Once again that is star one on your telephone keypad. Your first question is from the lineup Doug Mitchelson from credit Suisse.
Your line is now open.
Doug Mr. Doug Mitchelson.
Okay.
Davis bonds when he's addressed as Mr. Doug.
Sorry, Doug.
100 earnings seasons, I still can't figure out the mute button.
Look.
David I appreciate the update on the merger and the lower debt leverage can you talk about the content vision for the.
Combined company and how that's evolving I guess.
It's kind of a three part question David The first is Warner brothers investing enough now in content under AT&T, while they are sort of focused on.
On the merger.
How are you thinking about how much content spend should be to women in global streaming versus how much the companies are.
Spending today and do you have visibility on what Warner's, making that's going to be coming out in late 'twenty, two and 'twenty three 'twenty four.
Moving in particular is a two to three three year cycle any thoughts on that would be helpful. Thank you.
Thanks, Doug.
First this is something that John Stankey, and I talked about us.
We created this vision together of this company being what we believe is the best Media company.
With the with the greatest and most comprehensive content offering and as part of that we're spending more money on content and leaning in.
And Warner media spending more.
On content and leaning in we both committed.
To do that to keep both of our ecosystems.
And strong and growing so when the deal when and if the deal gets approved then we come together will come together with strength.
And you see that.
<unk>.
On the Warner side, where we're cheering them on with the success of dune.
Around the world.
With Ann and.
And Toby on that side, and Casey boys, having an incredible run at HBO with succession light Lotus tax mayor of East town.
It's just if you look at the culture and the impact of that content together with the extraordinary library they have us leaning in on our side with more original content.
And so for us.
We're also spending a lot more on the international side to get ready, we think that's a strategic advantage and when you look at the content.
We think in terms of the demographics that that we will appeal broadly to every demo I mentioned, this but with very strong with.
With women, that's a particular strength of discovery.
We are doing many quarters with a leading media company in America for women.
Together with length of view of women watching our channels, whether it's food or HG or oprah or I'd.
And TLC and Thats continuing.
In addition.
We look around the world, it's not just local content, but we're the leader in sports in Europe, They have sports in Latin America.
And CNN as the leader in news with the most compelling news brand around the world and one of the few.
Global may be the only global new service that has the kind of resources around the world in news gathering and so as we go out and build this service and make this offering and I do think it's the best content wins, there is a great product and in in Netflix and entertainment is a great.
Product with with Disney with <unk> is building.
With entertainment.
And we think we have a comparable product maybe even more diversely attractive in entertainment.
But on top of that.
We also have sports, which we are using in Europe, and learning a lot from and in markets like Poland, where we're doing news and sports together with broad entertainment and nonfiction, we're finding real meaningful traction and real reduction in churn and so I think we have a lot to learn.
But we have a terrific product and we're working on our go to market we have.
What on a an old friend of mine, who I've known for 15 years, one of the most talented people I think in the business. He is.
He is busy with a lot of other things, but we do have a commitment now that Kevin Mayer, who built the Disney plus will be in the car with as a consultant with J, B, and I, and Bruce and <unk> and the whole team.
We've already built as we've talked about our go to market strategy, we're gonna be honing that Kevin.
Has a big brain he's.
Learned a lot about this we've learned a lot in Europe and with discovery plus we've been at it for a long time, but he had a lot of success at Disney is Super excited about getting in the car with us and helping us with everything that he has learned a lot of knowledge about.
About windowing about about how different pieces of content, whether it's movies perform we're anxious to get in the room.
With an and and and and the team at Warner I was there last week meeting for the first time with and his whole team, but they're super smart over there and so we think adding Kevin to the overall team is going to be helpful to us.
Off we go.
Who's got the best menu I think we got the best menu.
And just one point I would add obviously, so we scrutinized sort of each other's investment plans as part of the.
The deal discussions and as we said.
Before all the financial guidance that we've given around the deal is always assuming a pretty significant step up in content investments over over the coming coming years.
Great. Thank you both.
Your next question is from the line of John Hodulik from UBS. Your line is now open.
Okay guys.
<unk>.
Couple of quick questions on advertising, obviously, a lot of sort of trend going into the fourth quarter, you got the step up from that from the upfronts, but potentially some.
Some slowdowns some supply chain issues.
Is there any way that you guys could sort of characterize what you see going forward on that side and maybe break out what youre seeing in terms of the linear business versus the DTC business.
Sure well I would just start with this is the most successful upfront that I've seen in my career.
I think from an industry perspective is up 20.
And it was very very materially bigger upfront for us because of premier and because of the length of view in the certain advertisers wanting to be aligned with the brands that we have and the characters that we have and so I think it's a big big helper to us that we had a very strong upfront there are supply chain issues.
There are put level issues.
But we're still seeing that will be material growth in advertising.
And.
We can't predict what's going to happen in the future, but as I've said before.
I saw a lot of people in the mid 90, saying that it's the end of broadcast television it may be a transition away from a lot of the younger demo being on there, but we see huge numbers and where we are.
Not getting credit for it but I think one of the reasons why the AD market was up so much for US is the advertisers know there's a massive audience over 55 watching food watching HG watching discovery watching I D.
And they get those right.
Right now they get them for free we talked about in the upfront number of us in the industry independently. We're out there trying to get credit for that but I think that the linear platform is is here for quite a long time and there'll be ups and downs on advertising, but advertisers.
I find it's very effective to be in in in linear video much more effective than others and then we have the complement of discovery plus which is just.
A huge driver for us in terms of the demo compliments and attractiveness of lunar.
Don't really have a lot to add to that David.
Very very good about our position the upfront.
Continued contributions from from DTC, but I did want to point out a little less visibility.
For the known resistance, so, but we'll be growing.
Very healthily in the fourth quarter I believe from today's perspective.
Great. Thanks, guys.
Yes.
Your next question is from the line of Jessica Reif Ehrlich from Bank of America. Your line is now open.
Hi, Thanks, I have two questions.
On the integration and I appreciate all the comments you didn't make what what is the most challenging areas and one area of opportunity and you you've actually gone through it at discovery.
Already in in waves, but you know on your technology stack and your Tech stack can you talk about you transitioned off of them.
Oh My God.
Major League baseball stamp tax sorry.
Amtech created your own so how do you look at combining with HBO Max like what are the challenges and what are the ultimate benefits and cost savings and then the second question. David You said in your prepared remarks that.
That you can make acquisitions without asset sales I'm, just wondering what what pieces do you think you're missing in the combined company.
Okay, Let me start by.
Saying look I don't think we're missing anything in the first thing we're going to do is look to drive all the tremendous assets and the differentiated IP and the.
Great Library, and local content that we have pull it all together and go to market. We think we have something quite strong.
Tom.
I'm, just making the point that there there will given that we're going to be delevering quicker given the fact that where we will be much lower levered than than expected that over time.
As others are struggling.
There'll be an opportunity for us to look at IP.
And to see where we need where we need more help if we need more help.
On the integration side, we're really lucky we got too.
Big tent Poles here.
One is garner will be the CFO of this company.
He did he has done an exceptional job.
He led the initiative with with scripts, where we said we'd be less than three five times Levered. Two years later and we did it in less than a year and we said, we'd deliver $350 million and we delivered over $1 billion.
And all of that was just costs not revenue synergy.
He came up with these targets is in is quite confident in those targets.
So gunnar will be kind of the lead horse here he'll talk to it.
We have a very experienced team here.
Bruce Campbell, and JB and Adrian I have been together for 25 years.
We're looking forward to bringing in some incredibly talented people at Warner, but when we acquired Universal J B was the one four.
For Bob Wright and for Jeff M. L that ran the integration of that entire transaction.
Which was cable movies theme parks.
With over 146 work teams and work groups.
And did it and did a magnificent job on that and so we were fully deployed we got we there's a lot that we cant do now, but qunar why don't I pass it off to you and J D.
And I'll, let <unk> comment on the.
On the tech.
Part of the of your question, Jessica, but again I mean from the perspective of challenges again as I've as I've been saying from the very beginning we've taken a conservative approach to this and we're very well aware of the up the size of the check that we're writing here for this combination and we have been.
Therefore, with our assumption so all the work that we've done since gives me more confidence in our ability to deliver or all countries from Gs.
As I as David said and as I said earlier on the in the prepared remarks.
Doing more work now having.
Transparency into albeit draft carve out financials for the Warner media carve out group.
As I said.
Cash payment is going to be a significantly lower one from today's perspective that gives us a better starting point from a from a leverage perspective and as we said earlier.
Sort of below four five times leverage that we're seeing right now is to a large extent driven by by working capital adjustments, but to some extent. That's also driven by by our current performance both for the P&L and the free cash flow.
Being.
Above what we what we assumed in our Conservative agency model that we based our first communication also again.
It's early still.
We obviously still can only do so much until we have regulatory clearance, but as we said the team is up and running.
<unk> Robinson, our chief transformation officer, and his team fully redirected.
At this now so that would move.
It hits, the ground running and I and I think we are in.
We're in very good shape.
You are pointing out obviously one of the key questions here with the tech platforms, Jeff Why don't you give a perspective on on how we're looking at that yes.
Jessica It's obviously, a big opportunity for US we look at it as a one where we're undergoing right now essentially an audit of both platforms and I don't think necessarily the decision is a monolithic one we look at these as multiple.
Multiple different modules that make up all the different components of both their and our tech platforms.
And we have a lot of experience as you mentioned in terms of the effort and the work and the discipline required and re platforming.
Either one to the other.
In one direction or the other that decision we haven't made yet, but we are undergoing obviously a significant diligence process to underscore which is the best.
In class on both and it may be a little bit of a combination of those depending on certain modules in the platform that we may apply and so we think it's actually a great opportunity because rich and Jason and the team on their side have obviously spent a lot of time and are investing a lot in upgrading their.
Tech platform as we speak we've obviously spent a lot of time and a lot of money doing the same over the course of the last 12 months to 18 months and as the two groups come together, we will have essentially a choice.
What we think will be an incredibly attractive kind of tech buffet that we will look to make the best.
Of both to decide how we move into a common platform going forward.
And then just maybe just one more.
Yes, no I just want to clarify one thing Jessica because if I if I understand your.
Western greatly you were referring to acquisitions, that's nothing that we that we said in our prepared remarks remarks, and just to clarify we're not anticipating or planning for any acquisitions at this point.
David will be fairly clear I guess gives you opportunity.
I just wanted to follow up on me.
It didn't take a long time.
With this as you said already you know with Bam Tech.
Can you just talk a little bit any color on what the cost savings will be from combining and what the benefits are from having one platform.
Well there'll be there will be meaningful cost savings from coming combining into one platform. I think there also will be meaningful consumer benefits.
Benefits from combining into one platform and I think the other thing to keep in mind is yes.
Part of what in David's comments about us being more disciplined and tactical at this stage of phasing. The further rollouts of discovery plus for example.
There's also a view towards we may be able to more quickly in markets, where we may not have launched discovery plus.
To be able to quickly fold more quickly fold the content offering into a joint platform.
At that stage versus having to re platform to existing platforms in our market into one and so I think speed to market will be a variant of both.
Where we have and Havent launched number one.
And number two.
While we.
The final decisions on exactly which parts of the tech platform.
We migrate to will influence how long it takes us to get there, but remember that there may be two phases to this where there may be an initial phase which allows for more of a quick bundling of services and a second phase, which eventually allows for obviously a common service on one tech platform that's.
That's the timeline and evolution certainly Jessica will talk to you more in detail as soon as we can give you more color.
But maybe if I can add one thing Jessica again, what we what we said when we first announced this deal. It was remember there is roughly $6 billion in technology and marketing spend between the two platforms and we are assuming growth. We brought together two companies with significant expansion plans a lot of that spend is by by by its nature or fixed.
Costs are relatively independent of the subscriber number obviously, there is a streaming related costs et cetera, but a lot of it is is fixed and so there's a huge opportunity to to completely so de duplicate that spend base and to <unk> point of multiple waves, especially on the marketing side.
I have no no doubt that we will out of the gate sort of even in the first phase before fully aligning our tech platforms will be able to get a lot of leverage out of the combined marketing spend.
Thank you so much.
Your next question is from the line of Alexia <unk> from Jpmorgan. Your line is now open.
So I had just a couple of questions. If I can how do you think about growing sort of local content.
Following the success, you're seeing that as you know with that strategy and then secondly, really on the new side is it better to have sort of a standalone new streaming service in your opinion are combined it was entertainments Jamie.
Thanks Alexia.
One of the.
Real advantages of discovery is for 20 years, we've been.
In market with local teams selling locally producing local content throughout Latin America throughout Europe.
In Europe, we expanded into free to air and a number of markets, where we're the equivalent of NBC or CBS in some markets with equivalent of like NBC and CBS combined.
In northern Europe in Poland.
We're quite big with number of free to air channels in Italy, and Germany, and we have a we have a library that's meaningful in each of those markets.
And we have.
A lot of data on what people are watching we have a good sense of what kind of content. They are looking at on the direct to consumer platforms, because we've been at it for a long time, we also have sports in Europe.
And we've we.
We've tried a lot of things some haven't worked out as well as we as well as we'd expect and that's a good thing because we've learned that sometimes packaging the sports independently doesn't work as well as packaging it more broadly.
Sports together reduces the churn significantly makes the appeal higher when you put sports together one that the payment together with non fiction. We came out with the Olympics, we had 1 million plus sign ups.
For the Olympics.
So we continue to learn and that's a good thing we're continuing continuing to invest learn and grow that's what John and and Jason and Anne and the team is continuing to do on a parallel basis independently.
But as we come together will all be smarter you look at what people thought about windowing of just as a student of this in the meetings I'm, having whats the right windowing strategy what works best for a direct to consumer product is it better to to have to build up a movie in the theater and then bring it is stronger on the platform as it goes day and date.
Is it stronger if it goes day and date at $30 versus free there's a lot that we're learning just as observers and theres a tremendous amount that Jason has learned in hand and that Disney has learned.
And that the industry has learned and one of the great benefits for me is I have this ability to really listen and also this has been a great experiment in how people are consuming content.
When people come on for a movie.
Our series at what's what's the reaction a lot of what is on the Warner side I haven't seen because at this point, we can't see it but the general industry knowledge and trends are things that we're noting aggressively and we're learning from and we're continuing to experiment in Europe on the new side.
Yeah.
We have been.
We've been experimenting ourselves.
And in Poland. We went independent now we're packaging it together I think it's going to.
It is probably going to depend on the market and it depends on the offering we have a very very strong service in Poland.
And it's been very helpful to us.
We're one of the leading voices in the market and we have a 24 hour news channel there that's quite compelling.
We don't know what the right answer yet, but having news and sports.
News is the more people go to a direct to consumer product the lower the churn and the more time they spend the lower the churn.
Why we're so excited about how much time people are spending with discovery, plus which has a library is that's being broadly viewed and.
And the idea that people spending hours on that product and the churn is low is encouraging for what bodes for the combination of the two but as people. If you could put news or sports and people also go regularly for that it's another reason to have the service. It's another recent the value of the service. That's another reason not to churn.
Out of the service.
Disney has been very effective in doing packaging of services, where you don't put them together.
Bundling and so.
And that's that's the current plan right now for C. N N as we've read about it and so it's exciting and we'll look and see.
Thank you very much.
Your next question is from the line of <unk> <unk> from RBC capital markets. Your line is now open.
Good morning, guys. Thanks for taking the questions I wanted to ask about DTC investments for Standalone discovery, and then drill in a bit on the deleveraging comments. So first given the deal. It clearly makes sense to take a more disciplined approach to our DTC strategy I assume this will drive some near term financial benefits.
Can you provide a bit more color on the DTC investment levels going ahead, I know you called out the low $200 million range for Q3, and Q4, where are you seeing some opportunities here and is that a good quarterly run rate through deal close or can the losses continue to maybe narrow given the strong top line trend.
And then just second accelerated path to deleveraging post deal close is very encouraging is there any more color you can provide on the drivers for both discovery Standalone, where you continue to deliver robust free cash flow and then on the pro forma outlook just sooner. It is fantastic to hear how your continued role here and I know.
You provided a lot of details already but any more specifics on the improved pro forma leverage targets, particularly if there is an updated view on pro forma EBITDA, given maybe some minor asset sales from the Warner media side. Thanks.
Yeah.
Great. Thank you.
So let me let me start with the with the Delevering a piece here and give a little more color again.
There are two things that we have updated one is sort of our model of how we how we look at pro forma combined financials for the company and number two is just flowing through our current performance and that's by the way are linked to your first question as well because we're just.
Doing a lot better and we're generating a lot more free cash flow than what we anticipated.
Half a year ago, but if you take a step back.
The the challenge here is that Warner media is not a standalone company, but it is a carve out group. We obviously made certain assumptions about what the balance sheet of that company and carve out group would look like but had to wait for some.
It's still draft carve out financials to get full confidence in the financial setup of that combined entity and the <unk>.
Accordingly, what we put into our model and what I presented to rating agencies for the.
For the rating discussion was a conservative model not fully flowing through certain adjustments. The most important one of which is the working capital adjustment. So we have always talked about the $43 billion as subject to adjustments and that's the working capital adjustment from today's perspective that looks like it's going to be.
Four 5 billion lower in terms of.
What the net payment is going to be with an impact on the net.
Net debt balance that we're going to start this company with <unk>.
And then that has obviously a very significant impact on leverage so the second thing, though is about 25% to 30% of this improvement here, it's just driven by our better operating performance obviously better.
It improves the denominator of that leverage equation and.
Developed very nicely as well.
I do want to caveat. This as we said right now it looks below four five times. This number is going to move around with working capital, but what has not been a change in my view is the very significantly increased confidence that I have and our ability to very very quickly delever below the three times to very quickly get us into.
The long term comfortable leverage target range and again, the other point I wanted to Oh.
You keep pointing out as we have already got a lot of questions. On this we have already anticipated very significant.
Very significant reinvestments in our business case.
To your first question.
On the DTC investments and all of that.
Talk about some of the opportunities.
Little more because we do have obviously the olympics coming up and.
Market launches are kicking in here, but youre right in general we've always.
Looked at and will continue to look at capital allocation through the lens of risk and return. The return side is is it's almost fairly easy in this in this space because it's just the relationship between customer lifetime value and subscriber acquisition costs and it is fair to say that I've asked the marketing teams to give us a little more cushion between the two are in order.
Two.
Some of the uncertainties as we go into the scenarios for the for next year. So.
You're right we should see.
More investment losses, especially if you keep in mind that the beginning of next year, we're starting to comp against the very significant investments that we made in the first quarter of 2020, as we launched the U S.
The U S product.
At the same time I also do want to point out, we're continuing and as David said it we're continuing to nourish the existing subscriber base that we have we're continuing to invest in content in a significant way so keep that in mind as well over the next few quarters. We will continue to see content expense coming up we're also continue.
And to invest in technology and product features but just a little less focus I would say in the mix on necessarily driving for the pre every last every last subscriber JV.
And the only other thing I'd add is obviously as we approach the deal term not surprisingly many of the partners that we work with internationally that have been a great part of our success.
And you've heard us talk about.
We're also asking the fair questions about how much money and how much effort they should put behind.
Launching in new markets as we go into 2022 given questions about the future brand in the future.
Product offering et cetera. So we're getting the same questions from partners, which is totally legitimate and sort of that.
He's making as you know in some cases rethink when is the right time to launch and a lot of that is largely when there are those things are being pushed off is a are pushing off of marketing and in some cases content expense.
To to later when we have a better view of what the the combined product will look like and we can come back to our partners with a more definitive sense of when and what we will be launching together.
That's great. Thank you both.
Your next question is from the line of Rich Greenfield from light shed partners. Your line is now open.
Thanks for taking the question.
A few months ago Warner media.
Platform.
It joins sort of Disney Netflix Hulu.
He basically just looking into the subscriber business and one.
Direct relationship versus sort of a wholesale relationship with Amazon, So I think thats fair.
What are the puts discovery by common stars as sort of the three.
Modest players like Amazon Channel again.
Yes.
With respect to the Big picture, how you think about the puts and takes of the Amazon whether theyre going fully independent.
E discovery future or whether you think companies like one we have been.
C not working with Amazon channel, but just be curious how you think about that and then just lastly on your commentary are you planning on keeping more HBO Max and discovery separate was absorbed into the bundle and comments you were making.
Integration is still not me.
Hello.
Thanks Rich.
We have a go to market strategy that we feel that we have that.
We've built.
I think Uh huh.
Haven't Kevin Mayer and the AR.
In the passenger seat with JV, and Bruce and I and eventually with the Warner team with all of his knowledge and expertise having built.
And driven a Disney plus globally I think.
A little.
It will help to finalize and fully informed our strategy, but we're given where we are in the regulatory process. We're just not.
Ready at this point to share all of that with you guys. We will we expect to and we will soon jae Bae.
Yeah, I mean rich on the on the channel store question. The reality is they've obviously been a very good partner of ours on the discovery side, we're well aware of that as you said H B O has taken a different position I think.
The three questions that we'd have that we are.
We are waiting to engage further with the H B O side is number one.
We have found so far that there was a question about these channel stores, bringing in a different customer base than what we might be able to address directly.
<unk> is an ongoing question and we've certainly seen some good incremental.
Describe our growth coming from that channel store ecosystem and how much of that is cannibalistic versus what we could do direct or not is an ongoing set of analysis that we have going and obviously, we want to compare notes.
With the HBO team at the right time, but Thats a question because ultimately we want to try and get our product out to as many consumers on whatever platforms.
The second is the data element and the customer relationship, which I think is a little less known and I think as.
We haven't made a decision definitively, but we are remaining very open and we'll certainly that'll be part of the story when we come back to you rich and the team will tell you more about it.
At the right time.
Very helpful. Thank you.
Your next question is from the line of Steven <unk> from Wells Fargo. Your line is now open.
Thanks.
Our target range of three times earlier than we originally originally mentioned.
And it is the two and a half to three times range that I that I that I want to see going forward and to your question about you know flexibility, we don't need flexibility because of our deal model already assumes very significant.
Reinvestments.
Further investments in building out.
D C product and growing content expenses over over the five year term here that we have that we have modeled so clear answer is yes.
Very very hopeful that we will be hitting.
Hitting the upper end of the two to two and a half to three times range earlier.
Regarding regarding raising debt again, we've mentioned the $15 billion hedge that we have put on and are pretty much in line with what I said earlier about the conservatism in our initial model.
The answer is yes. There is some there is some room we have obviously.
Taken some conservatism as well as we modeled out our our interest rates, we've we've locked in.
Attractive rates with this $15 billion of hedge program.
Don't want to make any promises will.
It still will be some time before we implement the financing, but a good part is hedged now and we'll have to monitor.
The spreads as well but.
I believe that we're in a very very comfortable position relative to what we put a.
Put out in the in the original statement and in our and our deal models and before I hand, it off to J b for the for the subscriber outlook here.
The financial part of that question is you should absolutely.
Further free cash flow performance here as we as we move forward I do want to have the balance sheet in the best possible shape as we come up on closing the deal and as I said earlier.
I know it explicitly guided to at least $2 $1 billion of free cash flow. So a significantly higher conversion than what we went into the year with what we guided at the beginning of the year and that's all part of our ambition here to be disciplined.
And get this our balance sheet and in perfect shape.
And I think consistent with what Gruner just said you we should assume obviously, we're continuing to obviously push and.
And see good growth in the markets, where we're in and we'll be launching.
Our newest market.
Zero here over the course of the next two weeks and.
And so we're excited about that and we still see healthy growth out of those markets and were spending at levels to <unk> point that we think are reasonable without meaning to four in.
But they'd be the sort of slightly more.
Conservative.
In fact, the LTV ratios that we're spending at plus.
The slowdown in some of the new market launches as we go towards the end of the year and into 2022. It doesn't mean that the net adds numbers will be a little bit slower than then they might've been the paas.
Yeah.
Great. Thank you.
And it may be worth just rich I realize we didn't hit Richard's second question about the bundling clarification, I think David and my point on the bundling with purely that in back to Jessica's question about the tech.
Rollout it will take a bit of time no question to come to one platform and so while that process is underway there will be opportunities in a much quicker fashion closer to day, one to potentially do some very creative bundling propositions that is a interim strategy not a long term strategy I think at this point is what we'd say.
Yeah.
This will be our last question from the line of Ben Swinburne from Morgan Stanley. Your line is now open.
Thanks, Good morning.
I think the release noted renewals with Directv and Verizon during the quarter I'm. Just wondering if you guys could give us a little bit of color on it.
Sort of the key takes there and whether you see healthy affiliate fee growth coming out of that or any changes in packaging and if the merger impacted how you approach those deals given David you've made that point that bring turned the Turner networks in Israel.
Underappreciated asset and part of this transaction. So that's that's my first one and then I just wanted to come back David Yeah. There's obviously a lot of focus on the merger and including your management team that youre, putting together congratulations on bringing Kevin on board is that I don't know how much you can say, but is there hope that that converts from a consultancy to an employee.
Ship and I'm, just curious if you're still going to remain chairman of the zone, which I think is is at least in some regard a competitor to you guys in Europe.
A lot.
Thanks.
Uh huh.
<unk> is a very old friend and tease out he is a.
He worked with me and Kevin in and providing the opportunity for us to get.
A good amount of Kevin's time, but you know he is fully committed to land and design and he's doing some other things as well.
He's he has driven down all of these paths.
And he's a great entrepreneur and he's got a number of really exciting things he's doing and working on this is one of them and Ah I think he is going to be really helpful to J, b and I and Bruce.
And he is having a great time doing what he's doing but he is super excited about.
It kind of really coming in and giving us the full scope of his experience and brain on on everything he's he's seen and learned in working with land has been a good thing I think he has seen and learn more about Europe in sports and.
So.
I think that's exciting the.
Team at Warner and the way they are growing.
The the knowledge the capability there the attack plan that they have is really impressive and Andy fossil was super strong it is.
If you look at the strength of that product you look at the strength of our product. So I think we've got a lot of really good people.
You've seen through the hits for our history with scripts that were really about who are the best people. So I think we're going to have be able to build a really strong team.
And bring in some outside experience as well.
But it's it's a it's really encouraging how well theyre doing and what we're learning along the way and that's a big helper to to US on the affiliate side and Gunnar you can fill in some more.
But I think we reached deals that were very favorable for us.
On the carriage side very strong.
And I think it's win win they don't they they want to commit to carry all of our channels and this whole idea that a bunch of our channels. We're gonna get dropped that never happened there good value I don't say I don't say that with great Glee, but when you look at the overall package.
Viewership.
Where we're a great value.
And they are making a lot of money selling or selling advertising on our services. So it went very well for us with it with meaningful increases and real security and I think it went well for them and continuing to get really good products.
And in terms of how do we.
No.
How does this align with Warner has nothing to do with it.
We're operating as an independent company and we're operating on the strength of the channels.
That Kathleen Finch and Nancy.
<unk> had been building here with discovery, and and Oprah and food and HG and so it's a we've been over delivering people love our stuff and it's just the reinforcing of this narrative that despite the fact that the world is changing.
That.
We were able to get deals with some of the toughest and strongest and most knowledgeable distributors on very favorable terms with strong carriage commitments.
As we make this transition together and so I think that's a it's a very good sign for the for the two sides are going or anything to add.
No I mean, you know obviously the caveat that we don't call them support the or we don't control the subscriber trends. So that's always the you know.
When we have as much visibility into that.
As many of you on the call here, but I'm very very pleased with the with the distribution teams. Our successes this year and we've got so many questions about sort of the outlook and we just continue to go through deal after deal after deal with with with very encouraging results.
Great. Thank you.
Yeah.
Thank you for joining us today and with that this concludes today's conference call. Thank you for attending you may now disconnect.
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