Q4 2021 Discovery Inc Earnings Call
Kind of our transaction with AT&T to create the world's most dynamic media Entertainment Company Warner Brothers Discovery.
Upon close Warner Brothers Discovery will stand on incredibly solid footing creatively and financially.
This is a real company.
And we expect to deliver meaningful free cash flow over the near and long term.
At discovery Standalone, we ended the year with $4 billion of cash and generated substantial free cash flow. This year over $2 4 billion, even after absorbing over $1 billion of losses from our next generation investments.
And our free cash flow will grow meaningfully from here.
As a company when we come together, we will stand on firm footing.
We look to benefit from both a very balanced business model.
Then from the cost synergy tailwind, we expect to result from our merger.
Supporting our expected reduction in gross leverage to three times or below within two years, starting from four five times or lower net debt to EBITDA when we stand up the new company.
Our vision for Warner Brothers Discovery is simple.
We believe the companies with the most appealing and most complete menu of IP and content stand to achieve success.
And I believe Warner Brothers Discovery has the most attractive content in the business.
From Batman Superman Wonder woman, Harry Potter game of Thrones Euphoria.
90 day fiance, Hanna Barbera Looney tunes.
The food network HGTV discovery HBO.
And great personalities like Martha Chip and Joanna Gaines Guy Fieri that property brothers and Oprah.
Plus CNN the Premier Global News network with real resources, our news gathering services all over the world.
Ports with Eurosport The Olympics NBA NCAA March Madness Major League baseball and the National Hockey League, making us a global leader in sports alongside a wealth of local content all over the world content that we've produced and gone.
<unk> for the last 20 plus years.
Taken together, we will have a broad menu of content to super serve every demo and every family member.
Who would ever want to leave.
When we bring all of our global content together.
We will have one of the most compelling offerings in the marketplace.
And at a great value to customers.
This was the premise and the vision that John and I shared when we put this deal together nearly a year ago.
Initially we plan to see how all of these existing and complementary content pieces fit together.
Well, our package of content nourishes and enriches consumers'.
And what it does to churn and growth.
From there, we can evaluate areas, where we'll need to spend to fill in for our offering.
Together, we already spend aggressively across all demos and genres.
And we will have an even greater ability to do so as a merged company.
And now we have the resources, we plan on being careful and judicious.
Our goal is to compete with the leading streaming services not to win the spending war.
With a breaking new franchises or re imagining and refreshing existing ones, we will have a truly scaled and diverse content engine.
With IP ownership across a highly monetize able collection of IP.
Perhaps most importantly.
We are not solely dependent on one business model as we reach across multiple platforms and touch points.
Every leg of the stool from linear to direct to consumer to content production and monetization.
As one of the leading content arms dealers in the industry Warner Brothers television is formidable.
And as a company, we will also be uniquely positioned to better serve advertisers and distributors globally.
Said another way, we can monetize across any number of different cash registers.
Consider that Warner Brothers television is over 100 active series being sold to over 20 platforms in outlets.
It's a content maker.
And content owner generating significant revenue free cash flow and most importantly optionality.
Not a lot of content makers out there certainly not of the scale and quality that Warner brothers television is in the marketplace today.
And particularly at a time when the demand for quality TV production has never been stronger.
An important distinction when considering the asset mix of this company.
Real very balanced and very complete company.
We have a lot of muscle memory from the Scripps merger, which enabled us to thoroughly reexamine, how we conduct our business and.
And we took that opportunity to better align our management operations and processes during a time of pronounced industry disruption and change.
I believe that this same dynamic exists with the opportunity ahead for Warner Brothers Discovery.
Turning briefly to the quarter I'd like to call out a few highlights while Gunnar will take you through in more detail the puts and takes.
First on the advertising side underlying demand across our networks and channels has been resilient.
Overall 2021 global advertising revenue increased 10% over 2020.
With growth from both domestic and the international segments.
In fact international segment advertising revenue increased 23% in 2021, excluding the summer Olympic games, finishing the year on a strong note with growth across all regions.
Here in the U S. I'm pleased with our solid end to the year.
Despite a marketplace that has endured some headwinds of course, COVID-19 and supply chain issues helped in part by our outperformance against an industry wide strong 2021 2022 upfront.
At the same time, we've been very pleased with the results of our recently renegotiating distribution deals in the U S T.
Team has done an excellent job continuing to demonstrate to affiliates that our portfolio is of great value and they have clearly seen that reflected in our numbers this year.
Within direct to consumer discovery plus continues to perform very well we end the year with 22 million total subscribers passing peak investment loss levels supported by consistent and continued strong kpis advertiser interest and overall monetization efforts as.
<unk> discussed, we've thoughtfully and tactically managed our rollout and we'll continue to do so while sharpening our focus and gaining perspective for the next leg of our direct to consumer journey with Warner Media and HBO.
Worth, noting we achieved a significant milestone this past quarter, having re platform our discovery plus tech stack across Europe brings.
Bringing it onto a single platform consistent with the U S.
We achieved this important migration quite seamlessly, enabling a more feature rich and personalized consumer experience.
These efforts should ultimately drive better consumer engagement higher retention and ultimately lower churn.
Further supporting the trend we've enjoyed over the last few quarters.
This re platforming also enables the rolling out of an AD light tier to discovery, plus and select international regions something as you know that was not contemplated when we launched at the end of 2020.
And which we expect will figure meaningfully in our eventual merged offering.
The opportunity here is large and we look to best practices from the U S.
We expect to launch the U K in March with additional countries in Europe , having been identified to follow thereafter.
As part of our global content strategy, we do believe premium Entertainment news and sports offers an attractive service in many markets.
And we are excited about the innovative deal with BT in the U K, where as we announced a few weeks ago. We earned final exclusive negotiations to create a rich extensive portfolio of sports content in that very important U K market.
We will combine our eurosport UK portfolio with BT sport.
Bringing together key matches from the Premier League.
And all of the UEFA Champions League Premiership rugby Olympic games, Cyclin Grant tours and Grand Slam tennis.
This will create a more compelling and simplified sport offering in the U K and Ireland, while also advancing our broader strategy of bringing sport and entertainment to more consumers with discovery plus.
Staying with sports for a moment and fresh off the winter games from Beijing.
Despite the many challenges and obstacles we.
We were very pleased with the event marked by healthy growth in subscriber additions streaming minutes in total viewers across our combined portfolio.
So, perhaps most importantly and building upon the momentum from the summer games in Japan.
It reinforced the value of delivering a much richer product experience that combines entertainment and sports in Europe with strong appeal for the whole household.
This enabled us to bring new and different viewers to the Olympics as well as to introduce more sports viewers to our entertainment content, which greatly improves retention and lifetime value.
And lastly, one closing thought before I turn it over to Gunnar.
Depending on how soon we can complete the closing of our merger.
This earnings could be our last as a stand alone discovery.
For me personally it has been the honor of a lifetime to run this very special company over the last 15 years.
Alongside such an extraordinary group of leaders employees and board members.
Folks that I've gotten to work with and learn from like John Malone, The New house in <unk> family and the Guy that started this all out of our garage with a crazy idea that discovery could change the world.
My Great friend, John Hendricks.
Having accomplished so much and to have had such a blast along the way I often remark.
This job is such a blessing of a lifetime and we're also lucky to be in this business and to get to do what we do.
And I could not be prouder of what we've achieved together.
But recognize that our most exciting days and biggest tests are ahead of us.
We absolutely can't wait to share the next leg of this journey with all of you.
To close I truly want to thank those of you that have joined us quarter ending quarter out.
During this first very formative chapter of discoveries corporate journey.
We believe the next chapter will be even more rewarding and fulfilling with that I'd like to turn it over to Gunnar.
Thank you David I'd like to start by echoing Davids comments. This was indeed, an exceptional year for discovery and one in which I believe we made significant strides across all of our financial operational and strategic priorities.
Speaking to our financial accomplishments I am proud of our continued focus on transformation and deficiency during continued disruption in our industry notwithstanding over $1 billion of losses from our investment initiatives. In 2021, we finished the year with over $2 $4 billion of free cash flow of 64% conversion of.
You have it.
The true Testament to both the resiliency of our core networks as well as overall balance of our global portfolio of assets.
Moreover, we ended the year with $4 billion of cash on our balance sheet and net leverage of three <unk> times, both of which have continued to improve thus far in 2022.
And based on our current momentum I remain very confident with our projected net leverage at closing of four five times or better and reiterate that our long term target leverage range for Warner Brothers Discovery remains two five to three times, which we intend to achieve within 24 months from closed and possibly sooner.
Now turning to the quarter, let me briefly provide some color on Q4 results for which from a high level underlying trends are more or less consistent with those of the last few quarters.
In the U S Q4 advertising was up 5% year over year, largely driven by strong pricing in linear and further supported by continued traction in the <unk> tier of discovery plus.
As I mentioned on our last call and not surprisingly, we have seen him a softness in the scatter market due to supply chain disruption and some category softness around COVID-19 .
<unk> ability remains limited in supply chain issues persist and we currently see low to mid single digit growth in Q1.
U S distribution revenue increased 17% helped by discovery plus and high on any of your affiliate rates more than offsetting declines in linear pay TV subscriber numbers of around 4% for our fully distributed portfolio.
Turning to international which I will discuss on a constant currency basis, starting with advertising momentum is quite a bit stronger than here in the U S. Increasing a healthy 12% in the fourth quarter benefiting from robust performance in all regions.
We continue to enjoy pricing upside, resulting from healthy demand across EMEA, particularly in the U K, Poland and the Netherlands, While Latin America continues to recover nicely also helped by share gains in key markets like Mexico, and overall healthy demand.
We are at the very early stages of rolling out an international at light tier for discovery plus first in the UK and Ireland in March with additional markets in EMEA to follow enabled by the international re platforming, which David previously alluded to we.
We are enthusiastic about the incremental consumer focused feature enhancements, which we expect will drive better engagement, resulting in continued churn reduction and monetization upside.
Distribution revenue increased 5% during Q4 as ongoing affiliate fee pressures in certain EMEA markets has been more than offset by the growth in discovery plus subscribers with strength in key markets like the U K the Nordics OLED in Brazil.
On the expense side total Q4 operating expenses increased 9%.
Cost of revenues decreased 4% helped in part by a more normalized sports schedule in Europe , partially offset by continued investment in content for discovery plus.
SG&A increased 29% due to overall marketing spend to support discovery, plus subscriber growth and new market launches.
Lastly, operating expenses in our core linear business decreased in the low single digit range for the year in line with our guidance.
To that end I'm very proud of the efforts across the company to support continued efficiency and overall cost management.
Hey, OIBDA for the quarter was up 15% to over $1 1 billion and was down only 8% for the year to $3 8 billion, which taken in the context of an incremental $600 million investment in nextgen initiatives and a roughly $200 million loss for the Olympics I am extremely proud of our results.
I do want to take a minute to call out both the criticality and the resiliency of our core linear networks business, we continue to invest and support these important brands and franchises while at the same time look to drive operational efficiency across the globe as we maximize their contribution to free cash flow and to fund our continued <unk>.
<unk> and direct to consumer.
Now turning to some housekeeping items and a couple of items to consider for the quarter as you update your models.
First U S. Other revenue was up $74 million during the quarter due to a nonrecurring noncash item, which flowed 100% to a OIBDA and which was a positive <unk> <unk> per share impact.
Second we recognized a <unk> 13 per share noncash loss from the $15 billion of notional interest rate hedges that we implemented in the third quarter to mitigate interest rate risk for future debt issuances to finance the cash portion of the Warner media transaction.
As I mentioned on the last earnings call. We are required to report the changes in fair market value on our income statement as the derivatives do not qualify as hedges for accounting purposes, which could result in some additional variability to our net income until the Warner media transaction closes.
Third group nine signed an agreement to merge with box in December 2021, as a result of the transaction, which closed earlier this week.
And the estimated value of our ownership in the New company, we recognized a 10 cents per share noncash impairment charge.
Finally, the impact of PPA amortization during the fourth quarter was <unk> 51 per share.
This is higher than in prior quarters as we reassessed the useful lives and amortization method for all of the purchase customer relationship intangible.
While the useful lives of these intangible assets did not change we decided to take a more conservative position in accelerated amortization to better align with expected cash flow.
As a result of this our Q4 G&A expense increased by nearly $200 million.
Adjusted for all of the above EPS would've been 73 per diluted share.
Our full year effective book tax rate was 16% of our cash tax rate was 25% for the year, excluding PPA amortization for 2022, we expect our tax rate to be in the mid 20% range.
Our cash tax rate is expected to be in the low to mid 20% range, excluding PPA for discovery stand alone.
And based on our planned rates, we expect FX to have a roughly $90 million to $100 million negative year over year impact on revenues and a negative $5 million to $10 million impact on EBITDA in 2022 inclusive of the existing hedges.
A quick update on where we currently stand and the transaction process. We have already satisfied most of the conditions to close unconditional clearance from the European Commission.
The expiration of the HSR waiting period clearance from all other key international markets and a favorable private letter ruling from the IRS for AT&T.
We also filed our final merger proxy earlier this month and have scheduled our stockholder meeting for a March 11th.
Following the vote and assuming the deal is approved by our shareholders. This puts us on a clear track to close in early Q2 that will be a wonderful achievement that reflects our best case estimates from a year ago.
I am encouraged by the continuing operating and financial momentum at discovery during what has undoubtedly been a hectic year and we could not be more excited to get going on integrating the two companies as well as delivering the promises we have made to you, including $3 billion plus of cost synergies and driving significant free cash flow to deleverage that.
Company down to our target leverage range within 24 months.
Having recently conducted some high level meetings across our respective companies I think it's fair to say that both the discovery and want our teams are eager to begin collaborating in earnest to build one of the most dynamic media entertainment companies in the world now with that I'd like to turn the call over to the operator, and David JB and I will be happy to take your questions.
Ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone can withdraw your question press the pound key please limit yourself to one question and one follow up for an additional question. Please re enter the queue.
One moment for your first question.
Your first question comes from the line of Robert Fishman with Moffett Nathanson. Your line is open you may now ask your question.
Hi, good morning.
Given the new geopolitical risks from Russia can you just remind us what percent of discovery's revenue come from Europe , and Asia for what it would be on a pro forma basis for Warner Brothers discovery, and whether you've seen any early pull back on advertising in the region. Obviously understanding that the Olympics just wrapped up there and then I have a separate one for Gunnar.
<unk> policy.
Okay go ahead.
Our JV.
Right.
Yes, I can take it.
Michael It's an immaterial.
Proportion of our financials.
About 1% of.
Profits that we're generating in.
In the affected regions.
J B, if you could just.
Comment more broadly.
I'd say.
<unk>.
The Ukrainian market itself, obviously, it's even us.
It's absolutely de Minimis.
Short answer in Russia, specifically as you may have remembered a couple of years ago.
When the regulatory regime changed in that country, and we are obligated to restructure our agreements to actually be represented by a local player we did that and to be come into compliance with local regulations. So we already have a deal structure in place that is partnered with a local Russian entity.
So.
For the time being based on obviously there is a very dynamic situation based on everything that we've been able to study up until literally real time. This morning.
We don't see any impact.
But we're going to continue to track it and see.
And as Gunnar said, even if you include the Russian market, it's still a very immaterial in respect to the total discovery.
Company as as it relates to the larger European footprint obviously.
Markets that are important to us like Poland like some of the eastern European markets, which are the most likely to be affected.
Again for the time being we haven't seen any impact we are pacing very nicely for the first quarter, but that is a situation that is going to continue to evolve and we will continue to track it.
And then for Gunnar just following up on the change in amortization policy can you discuss if we are also reexamining, the changing viewing behavior habits, and how that might impact any of your content amortization included in EBITDA.
No. Michael this is really I mean this is.
It was in.
A review of our accounting methodology here remember this is.
Surprise allocation that we took on with the acquisition of scripts.
And obviously, we review these on the <unk>.
Regular basis.
Obviously also spent a lot of time thinking about purchase price allocation for.
Warner Media.
And.
As such this is noncash.
We paid for Scripps.
Just generally like to take as conservative as possibly position here.
<unk> benefited from having these intangibles.
On the balance sheet. So what's going to happen is you saw a $200 million impact in the fourth quarter, but again, we're not changing the amortization period, where just front loading.
The rate of amortization. So this is going to just increase the amortization of these positions for the next.
Two three years and then decrease.
The amortization in the outer years.
Just one point.
Coming off of.
<unk> point about scripts.
Wanted to mention that if you look at our company today and how we came together with one or none of that would have been possible in my view without the business that Ken Lowe built and when I say, Ken Lowe built I mean, as a real entrepreneur came up with the idea for for those channels.
At a time when broadcasters, we're dominant than everyone thought home channel.
It didn't make a lot of sense, but home and food and the personalities and understanding brand building building a great culture.
And in a fantastic business and when we came together.
That really gave us tremendous strength and diversity.
In nonfiction. It also gave us more confidence to go to the market with D plus.
And then a much broader menu and bouquet.
<unk>.
That transaction and the opportunity to work with Ken over these many years for all of us.
Enrich the company and positioned us to be able to do the Warner deal and positions us I think to be more successful because that content is worked really well around the world.
Thanks, Robert that's correct great.
Great.
All right.
I didn't properly answered your Robert I didn't properly.
Answering your question.
Because you were also focused on content amortization Thats something we also obviously.
Confirm on a on a quarterly basis.
And there was no change to these policies last year or so.
And then you've got the linear world the potential further exploitation of content in the digital world those are sort of balancing each other out right now so we haven't made any changes there.
See any need for that.
Got it thank you.
And your next question comes from the line of Doug Mitchelson with Credit Suisse. Your line is open.
Thanks, so much.
Or would you just talk about your confidence level in the $14 billion EBITDA, an $8 billion of free cash flow guidance for 2023.
If that confidence has evolved at all in and why and then I guess the follow up to that is should we look at that level of guidance 14 billion and $8 billion is suggesting you don't see a need to ramp content spending rapidly, which a lot of folks are worried about that.
That looks like a guidance that would suggest youre just going to continue along the path that HBO already had planned for their content spending ramp so any correlation between that guidance and your intentions regarding content spending would be helpful. Thank you.
Sure sure let me let me start here.
One yes for full confidence in the guidance that we gave.
When we announced this deal again as you know we're in a.
And then approval process here so.
We have done some more work but.
Are eager to get into the detailed planning of these synergies after closing.
But again everything we've learned.
Far has if anything given me more confidence in our ability to generate these numbers when it comes to content investments.
We received that question a lot over the past couple of weeks I understandably, given what's been going on in the ecosystem a couple of things here number one.
We have in our numbers baked in a very significant increase.
Content, ending and we have put zero synergy against that.
Number two is we are currently spending at a peak level or at least the highest level that we have seen in the history of this company.
We spent more than $4 billion for content in 2021 discovery alone and obviously also on the Warner media side.
Increases in spend so we are definitely.
Spending enough from my perspective. The key question is going to be how much is going to be enough going forward, we have plenty of.
<unk> room in our business case, and I will also say as David said in his opening remarks here for us it's not about winning the spending more money.
Money doesn't score goals.
As the European soccer analogy would be.
We will have a greatly complementary portfolio of content.
Focus areas between discovery, plus an HBO Max is a matter of fact.
We're going to be covering all four quadrants.
No one else and that could actually drive to content efficiency that we haven't been able to get as two standalone companies at this company plus we have invested in content areas that slightly outside of our lane in order to broaden.
The appeal and certainly everybody is modest.
On the HBO Max side to get more female.
Et cetera, with investments that might not be.
Perfectly in the wheelhouse, so I actually have hope that we might be getting away with a little less.
But we certainly have taken a conservative approach and put in a very significant room for increases I don't know David or JB. So.
Look I think we start with the premise.
That.
The idea for this transaction was we have a library as big as Netflix with content that people love and the U S local content around the world.
In the entertainment and nonfiction space and in sport and that when we bring that together with the with HBO and the team with the best television Library in the World in My view in motion Picture Library that the first question is yes.
How well does that do we have a very low churn product in the U S.
Yes, our churn is is getting better in Europe as we've made it broader.
And when we put these two together.
I think it's the broadest most compelling offering of of content available and it appeals to from people vary from the kids at a very young too with Looney tunes, and Hanna Barbera and Harry Potter to the DC content two to the content.
Debt.
That older people in every generation logs and we see that there is also a different viewing pattern between what's going on in HBO, Max and with discovery plus a lot of our content is viewed throughout the day. So the first question is how do we do when we come together what happens to churn what happens to growth as I said, we are a real comes.
What I mean by that is we're going to be generating $8 billion or more in free cash flow. So we have plenty of money to spend that already assumes that we're going to spend more money on content, but we're not going to we're not going to just spend.
To figure to.
To have more content on the platform. The key to these platforms, which is true of free to air channels on cable channels as you spend enough.
You could nourish an audience that they want to spend time with you and that they feel that Europe .
That you are the place that they want to be in your important low churn high usage usage by many people in the family and we're going to be very careful about looking at how we do.
And Theres a good we believe there is a chance that we're going to do quite well and we also have very low cost content and that we're not going to have to increase investment significantly that our bouquet will be differentiated and compelling.
But we do have the resources, if we see that spending more will get us.
More growth.
And.
Lower churn and good economics on our pool, but we'll be very careful because.
We have a real company, that's generating real value.
Thank you.
And your next question comes from the line of Philip Cusick with Jpmorgan. Your line is open.
Hi, guys. Thank you.
I Wonder if you could talk about just remind us how you think these days David of cost savings and synergies from Warner compare the difficulty in size of the opportunity versus the Scripps deal anything changing there as you've got more into it. Thanks.
Why don't you why don't you we have been side by side on this for the last several months and.
The good news is that we've been digging in with Ann and with the team and we've been able to kind of confirm a lot of a lot of what we thought but why don't you.
As the general here just take Philip through.
Sure.
Yes.
Short answer here is we are fully aware of the fact that this is much larger.
It's going to be much more complicated and complex.
What we dealt with when we bought the Scripps or discovery together that said all the work that we have done.
And as I said in my.
Earlier response here, if anything I've gotten.
More excited about the opportunity.
We've had very high level meetings.
With the Warner media side as well.
But going very well and remember we have a couple of.
Unique.
Points here the constellation one has been a lot of the cost saving is actually going to come out of cost avoidance right now we're running two completely separate.
The consumer technology stacks of marketing operations.
Pending roughly $6 billion for technology and marketing between HBO Max of discovery plus.
Clearly once we have successfully migrated.
Those technology stacks into one.
There is going to be tremendous opportunity to reduce costs and the second point here is that for both plants we had.
Anticipated very significant investment increases.
Which one of one of those ramps is going to go away as well that could easily make upfront.
Half of the total cost synergy potential here and then we have the linear portfolio.
I think on both sides of a lot of experience in.
I have been encouraging people to go back and look at how.
The efficiency change when we combined Scripps or discovery Theres, just a lot of very straightforward opportunity.
And then what I do want to point out as well.
All of the areas in which we have not assumed any.
Cost synergies again.
You mentioned content.
But also the entire studio operation CNN et cetera et cetera. So.
Again, I think what we're going to see is a good point.
Are we going to broaden the scope of potential initiatives. Once we once we close the deal, but I feel very good about our ability to get these numbers.
The other point is that we haven't assumed any revenue synergy and the ability to come to market with in the U S. The broad bouquet of content means that we can service advertisers and distributors much more effectively.
Forgive me if im premature on this but there's been a lot of headlines about CNN plus ramping up it seems like Theres a lot of business model overlap there with discovery plus and I think you can you can add about that.
Yes.
We will in the next in the near term sit down and get a.
I have a real business plan discussion with the people with CNN and CNN plus we haven't had that yet we havent seen it.
I have been watching a lot of CNN.
This is where you see the difference between a new service that has real has meaningful resources globally news gathering resources the biggest.
And largest group of global journalists of any media company, maybe with the exception of the BBC.
And here, we are waking up this morning with a war.
CNN is going to multiple cars correspondence and journalists risking their lives in Ukraine in Poland in Russia on the ground.
And there's no organization news organization in the world that looks like CNN that can do what CNN does and I think it becomes very clear as you go around the world and you look at all the news channels that are where people are sitting behind desks and given their opinion about what's going on there is a news network that's on the ground with journalists.
In bullet proof vests, and helmets doing what journalists do best which is fight to tell the truth and dangerous places so that we will.
Ken can can be safe and we can assess what's going on and what's dangerous in the world. So it's a proud moment for us to watch what's going on there.
But.
Because of this deal has not.
Closed yet that.
CNN is being run by AT&T.
<unk>.
We're in the beginning process of.
Getting the details on what Theyre doing.
And it's worth Dave I can add one thing on the synergy Phil the other opportunities that are significant.
The Warner International basic channels businesses about 10 times the size of revenue of what Scripps was so I think also the.
The opportunity on the channels integration on international will also be much more significant than it was in the scores business.
Thank you again.
And your next question comes from the line of Jessica Reif Ehrlich with Bank of America. Your line is now open you May now ask your question Alright, Thank you and good morning, everyone.
So.
On the costs you are on the cusp of closing the deal and the hard part is obviously in front of you given.
The changes you need to implement where should we expect to see early results in revenue and costs and maybe.
Specifically, the Upfronts and in May and it seems like Youll close before then.
The old time, Warner or Warner Brothers traditionally had silos between entertainment news and sports do you expect to go to market with all segments under one sales force it yes.
Listen cons of doing that.
And my follow up I'll, just ask now.
You called out the Olympics performance, which is clearly very different than the U S. Experience can you talk a little bit about the lessons learned from the first two Olympics and expectations for Paris and 24.
Sure well first.
We've been focusing really on cost.
And after we close when we get into the business will have a chance to to to think about revenue opportunities, but our number one priority has been.
Focusing on cost and analyzing opportunities within synergy that reflect the.
The $3 billion.
<unk>.
We can get more into the synergies.
Gunnar, but I just wanted to speak to the Olympics, and then pass it to to J B.
We have focused very hard.
Throughout Europe with all sports.
<unk> really driving local recognition of athletes good local athletes whats at stake for them, where did they come from why do you care and what we've learned over the years with our three sports channels and with our direct to consumer business as it is.
Not just the love of the sport.
It's the love of the athletes.
And that.
That when you see.
<unk> lined up you want to know.
You want to know the back story and that has really worked for us across sport and JV and Andrew and the team spent months promoting local athletes with the objective that if you. If you went down a main street in any country and you said, who you are looking forward to seeing in the Olympics.
We would the objective was that you'd be able to name between five and 10 people and I think that had a lot to do in terms of execution with what we saw.
With with viewership across Europe JV.
Yeah, I'd look I think Jessica we've learned a couple of things the focus as David said I'd say on the production side has been very much focused on content historic telling on local heroes and athletes.
Also we understood in this digital and social age that people want to see more authentic.
Representation of the athletes lives and so we've also introduced.
Things like family Cams, and showing particularly in this virtual world over the last two games, where a lot of the families have not been able to be on site.
Showing how their families and friends are rooting for them back home and bringing that and making it a more intimate authentic experience of a full representation of the support crew that supports these athletes.
And then lastly on.
The last thing that we've also continued to build out the best set of experts in terms of on air talent in the business by far so people know to come to us because we have the best set of.
On air talent.
Oftentimes our metal lift themselves Olympians themselves and then lastly, we've really continued to invest in innovative technology to bring the games and the stories to life and different and innovative ways that are not gimmicky, but ultimately really bringing the storytelling to life augmented reality being one we've done a little.
Simple things like <unk>.
Our announced there being on camera and having.
Fees from our announcements we have obviously a lot of passion as they are watching international games and so we're continuing to innovate on the technology, which has helped bring again as to life in a different way and so we're incredibly proud of what our team has done as David said in a very difficult situation and were very pleased that both in terms of our linear ratings being <unk>.
Comparable to what we saw four years ago on <unk>, despite the put levels in that period being down double digit.
But our experience is very different than others, obviously in the last both this game and the Tokyo games for that matter.
Good morning.
<unk> was asking about a little more on cost synergy I think you've covered a lot of it but any other thoughts I mean.
I think I think the one thing I would add Jeff if your point about the timing look we're we want to hit the ground running we have stood up integration management office is both on the Warner media side and on the discovery side, we've got a fall.
Full teams in flight working on setting up the work streams et cetera, but that said were still operating as two independent companies are right now.
Very limited.
Interaction.
Regarding actual savings measures so with that said what I want you to expect as sort of an initial wave of savings after closing, which a lot of it is going to be straightforward.
Early quick wins, and then we'll get to work on detailing out the longer term infrastructure set up.
That's the reason why we have focused our communications on 2023, because 2022 was always going to be a little noisy.
Coming together.
A third into the year.
Etc. So 2023.
For me sort of the the year or so but for the full on.
Synergy capture here.
Our objective is get the deal closed.
And <unk>.
Implement these work streams on cost and then sit down and look at the opportunity to serve advertisers more effectively and efficiently and we will have the upfront.
Hopefully.
It will be closed before the upfront that looks like that will probably be the case and then we will be able to start to put together an upfront strategy.
Great. Thank you.
Your next question comes from the line of Michael Morris.
Hi. Your line is open you may now ask your question.
Great. Thank you. Good morning, guys two questions for me first David you spoke about Warner Brothers television.
And historically, that's been a somewhat unique business and its size, but also.
Selling outside of the company.
You referenced that being something you sort of expect going forward.
<unk>.
In recent times it feels like companies are trying to pull more content back yet.
And perhaps in situations, where they've sold externally.
Been disappointed with that decision. So maybe you could just talk about the balance there given the size of the business, but also the interest in fueling your own platform.
And my second question.
Maybe for Gunnar is really on the long term margin structure for the business.
And thinking about the streaming industry more broadly.
The guidance that you guys have given sort of implies a high 20% EBITDA margin, which is.
Below the historical cable business, but but definitely at the high end of the streaming business. So I guess the question is really how do you see that converging over time, but also when you think of our sort of scaled street business globally. What is its margin structure looks like over the long term. Thanks guys.
Thanks, Michael.
Ah.
I have been for many many years in.
Deep envy.
Warner Brothers television, having spent 18 years at NBC.
Must CTV.
And Jack Welch would often remind.
The heads of entertainment.
Of this that it was really Warner brothers television that all of those shows were produced by Warner Brothers and the business that.
<unk> is running right now is generating.
Significant revenue.
And in some ways, it's doing two things.
It's probably the best and largest producer of quality content TV content in the world.
We're in that business, where you have a business called all three as many of you know we're 50 50 with with Liberty Global with 35 production companies that business has gotten Jane certain runs it a lot better because there are multiple bidders for quality content.
And when you look at Warner Brothers television it's.
It's a very very compelling business and in a market where.
There arent many makers and as you said, even the smaller makers are making just saying let me just make for myself.
We I look at that business and I see tremendous optionality.
Something thats really rare to have a maker of the scale of Warner brothers television with some of the greatest TV producers in the world.
Rob Reiner Chuck Lorre.
Most prolific working at Warner Brothers gives us great Optionality, we can produce more content for HBO and HBO Max.
We can produce more content to generate more free cash flow and profit by taking advantage as an arms dealer of something that's very rare the ability to provide great content to apple or to the broadcasters or to other other providers will get in there and figure it out but in the end.
When I say this is a balanced company.
This is a big piece of it that we have a big production at that entity that makes a lot of money and we have the ability to ramp that up to make more money in an environment, where there is lots of need or we have an ability to ramp that up and provide.
More for ourselves, which also provide some economic efficiency and so it's a great asset we're looking forward to learning more about it.
And leaning into it.
Okay.
And on the.
On the margin side, Mike So a couple of points here.
If we take a step back and look at the pure math and if we look at a long term horizon here with the 10 year projections that we saw in our in our S. Four.
It's reasonable to assume sort of slightly declining margins on the linear side and then we have all talked about DTC, reaching there.
At the peak investment point discovery plus as you know has peaked in 2021 from a investment loss perspective, HBO Max is guided to peak from that perspective in 2022. So there will be very significant margin improvement in those businesses.
David described.
The.
The macro tailwind for the TV studio.
So that should be a positive as well, but if you take these underlying trends by business and then factor in that there is probably going to be a mix change with D to C. Obviously are growing significantly faster than I think that gives you a feeling.
For for how we got to this to this margin down to those levels that you see in the <unk>.
The S. Four we have said.
We launched discovery that we were confident to be able to get to a 20% margin at scale.
Netflix is roughly today and the the point that I want you to takeaway as well as I do think and I've said many times from.
From today's perspective, I think we can do better.
That 20% number and.
That is because we are very uniquely positioned.
We're making.
The combined companies can be very uniquely positioned we're making the content. We can decide flexibly, where the greatest value is we've got multiple bites at the Apple when it comes to monetizing the investment on our platform and again, we've talked about that so much.
Virtually.
Using every available revenue stream.
The way, we're sometimes double or triple dipping monetizing content.
U S linear environment TV everywhere discovery plus on the international side basic pay them in certain markets. We've been very successful launch crude are on top and.
Almost every dollar of that JV spends on content.
Is is.
Use both on.
This can be plus international and linear platforms. That's a huge advantage and also the fact that we're getting.
Subscription distribution and advertising revenues. So I think we will always have an advantage with that global footprint when it comes to monetizing the IP investments.
And.
Again as we've also said several times, we're not going to be in a race here to.
When the spending more or two when they start subscriber numbers were managing.
Our business for the long term.
Shareholder value and to the <unk>.
Searching all platforms at the same time.
So.
I've always felt one of the great strengths of discovery is that we were free cash flow machine and we were laser focused on on that metric as being a real metric that represents the quality of our company and when we look at 'twenty three in that $8 billion.
That gives us a lot of stress, but we're not going to just say lets poor everything into the direct to consumer business. There is a level of investment that makes sense for that business and.
That's how we're going to attack it we will be looking to monetize our IP to grow firm the value of the overall company to build shareholder value and we have an ability to do that uniquely as a global company in ways that most companies can't.
Thank you.
Your next question comes from the line of Brandon <unk> with Keybanc capital markets. Your line is open and you may now ask your question.
Awesome.
Separate question, if I could please one on the linear advertising side your trends in advertising are significantly different than the company that youre merging with <unk>.
Was hoping you could help us understand your plans to really turn it around the Turner portion.
Maybe it goes back to some of the Jessica questions, but how should we think about discovery's winter linear advertising growth.
Particularly in the U S. For 2022, then just separately on Australia could you talk about.
Churn for discovery, plus how do you measure how do we think about monthly churn rates and really.
What should we be looking for for churn in that service going forward, particularly as you sort of layer in each.
<unk> content. Thanks.
Well, we can start with the second one maybe.
Sure Brandon So I think on the discovery plus churn numbers I think we obviously are not.
I'll talk about specific numbers, but I can tell you this which as David alluded to.
Separate in the U S and international the U S. One of the great greater things we've experienced over the course of the last year is that compared to.
The best in class in the market that our numbers are not quite there yet but looking.
Very competitive with some of the best in market.
And that's the reality is only 12 months out of the gate when our product.
All the elements of our product both in terms of.
Engagement and retention capabilities I would say right now it's still not at certainly.
Even on par with some of the best in market yet so.
We we feel great about where we are one year out being.
In the in the same ZIP code as some of the best in market.
And then internationally.
Had I think a much more we've been much more challenged candidly a hit.
Historically and as David said part of the issue was that our platform.
It wasn't a sophisticated because it came from our legacy pre discovery plus launch in the U S front and that Didnt have nearly the tools for personalization.
Profiles are really basic things that we couldnt enable.
And by completing that re platforming at the end of last year.
We came out of 2021 with record lows on.
On churn in internationally still higher than the U S.
But the great news is the trend we saw towards the end of the year and into the first quarter.
Is very promising.
And a big part of that we think is going to continue to improve by just having the product features that have been available in the U S. Now available to us outside the U S.
And as the proposition and add the product features continue to improve over the course of the next couple months, we think theres opportunity for those numbers to come even lower so.
Hopefully that gives you a little bit of a flavor the only thing I'll add.
Is that.
We went to market with over the years with this idea that we could build superfan niche businesses and we tried to do that with cycling and we tried to do that with tennis.
And we separated sport from not from the non fiction and entertainment offering and one of them aside from the quality of the platform.
Is that.
We learned and this is good every time.
Every time, we have a challenge. The question is okay. What can we do differently that will improve the experience for the consumer that a broader menu of content is more people in the home using it.
Longer length of view in the aggregate.
Lower churn and so the experience over the last few years as we put as we add to the offering.
The broader the offering.
The lower the churn and the more satisfied.
The consumers are and so that's something that leads us to this to the conclusion that bringing this whole thing together.
Is going to be very compelling and theres a number of markets in Europe , where we're the leading broadcaster. So we have all the entertainment we have the non fiction we have the sport in some markets. We also have news and in in those markets, we're doing very very well.
And our churn numbers are looking very encouraging and so that's one of the things that has led us to be so optimistic or Italy or optimistic about the fact that the strategic.
Tac of putting it all together.
We'll provide a broad menu that'll be provide growth lower churn and better customer satisfaction.
Okay.
On the advertising point I mean, obviously, you'll understand we can't talk about specific plans here for the combined company, but I do want to give you a couple of general points and then one deal specific point. So number one just generally speaking.
No doubt that ratings across the industry are under pressure. So we have less inventory we've continued to grow for a number of reasons.
And I have every reason to believe that we're going to continue to grow with this lineup number one and we don't have to go through the details again, but cable has always been under monetized in a major way David has been talking about this for years. We're finally seeing some real traction as people sort of sharpen their pencil, it's just a great deal to spend.
30% less than on broadcast on our networks and we can still double our CPM and.
We've talked about that a lot.
Targeting even in the linear space dynamic AD insertion at this point.
Past the point of just pilots and testing.
There is an opportunity there and then finally as we look at digital with eyeballs sort of moving out of the linear ecosystem into a direct to consumer ecosystem, we're getting as we laid out in our presentation. When we launched discovery plus up to three X cpm's, because we're covering more demos and age groups.
Get better targeting etcetera, etcetera. So there is a lot of monetization opportunity.
Lift in that in that traditional business. The deal specific point that I do want to make is what we learned when we combined discovery and Scripps is you go back and look at the number in virtually every market globally, we were able to get much better rating out of the existing content output because we were optimizing suddenly.
We're able to optimize across a portfolio of networks.
<unk> was able to launch new networks and reprogram networks internationally.
Did very significant programming changes across the combined Scripps and discovery.
Portfolio in the U S. So we were able if you look at the ratings trends to outperform the industry on a global basis for several years following that combination and I think that's a general theme, which I would I would hope to get some.
Some traction out of when we combine these two fantastic portfolios as well so I really feel very very positively about.
The AD sales side.
With the caveat that obviously no one is.
Expecting any any viewership growth.
Its day in Asia.
Great. Thank you for taking the questions.
Your next question comes from the line of James and Jason Bazinet with Citi. Your line is now open you may ask your question.
So as you guys have such a great track record in international markets I was just having international DTC question.
If you ask the buy side a year ago, how big the opportunity was they would have said 800 million or a 1 billion households.
And if you ask the buy side now that would give you a number that's like a third of that because some of the bigger players are seeing decelerating net ads.
And I just I know you guys have.
<unk> news and a wide array of content, but.
Whats your view of what that number is and what will it take.
Sort of sort of deepen penetration outside the U S. Thanks.
Thanks, Jason.
Look I think that.
Yeah.
There is there is a certain number of people pay 14 or $15 for TV.
And your.
You can model out country by country, and Theres different cultures and different willingness to pay for content in different markets.
What that aggregates too.
But with the way that we see it is we will have we will have an AD free product.
Where will we will be competing in that space, but then we'll have an AD light product that we're going to be very successful with that as much.
Less expensive and so what is the market for our product much less expensive that has limited commercials, but it is very broad and has a compelling menu of IP.
And is available on every platform.
So what is how does that broaden the market and then if you actually we take a when we take a look inside of <unk>, plus and we haven't been able to look inside of HBO, Max and we don't know exactly what they're doing with their library, but.
Warner has the largest TV and motion picture library. They have the they have half of the MGM motion picture Library, we have a huge library and so I really see and we as a company see three funnels. Our objective is to reach everybody does certain percentage of people that will be willing to pay $15 for a premium <unk>.
<unk> with no commercials there'll be we will have a lower priced product that will attract a broader view of people with limited commercials and we've seen a lot of success with <unk> equal or greater to the higher fee and then finally as we get more sophisticated we will see that there is a substantial portion of content that we own movie.
<unk> TV. This is true for discovery right now.
That is not being used that much on the premium service and so eventually we should be using all of that now we may be using that on channels, but ultimately.
You could see a a subscription only service and add light service and then a a free digital service so that.
Everybody can go to and it.
It might be.
Vanilla labeled but putting in a lot of the content. So that theres a lot of people that will never pay for TV, but they can go to and view this content and that will be advertiser supported and so in the long range. I think there were a number of players that are very tied to this idea of subscription only.
But as a company, we probably have the most content the most diverse content the.
The most content in language around the world and our ambition is that let's work really hard to drive the aggregate product in in subscription and AD light.
And then let's take a look at who we're not getting and what content. We have that could serve them in advertiser only eventually I think there will be a digital broadcast global broadcast network. It will have very different content in the subscription or add light, but there'll be people that do not want to pay and they want to watch content and.
Who has more content than Warner brothers discovery and.
So figuring out how to do that will be one of the strategic initiatives that we have in place.
And as David said, but that strategy is not just a theory.
Same strategy that led us in Europe to get into free to air over the last 10 years.
Pay TV <unk>.
Penetrated up to in certain markets, only 20%, 30% Thats, a 60, 70% of the market was never going to be interested in paying for television.
With David.
At the time that the group went out and started launching free to air and we ended up developing a whole new audience segment.
20 in some cases, 30% margin businesses in the free to air that model may eventually migrate to kind of what we call free to view.
It moves to digital but we think thats another alternative.
But we want to go after every customer segment.
Finally different product offerings in each one and we'll have the content depth and breadth to be able to do it when you look at the combined company that broadcast model we call. The broadcast but we didn't have we didn't have news we didn't have sports.
In many cases for a couple of years, we didn't have any original content. We just used library content and for instance in Italy, We had the number one channel for broadcast channel for women.
Within six months of launching it in our cost was.
The minimus.
And Jason if I can just add one point from the perspective of just achieving long term sustainable growth remember that while the international markets have lower ARPA.
You're probably going to see some of that impact over time as international subs sort of increase in the mix here for us.
It's multiple relative to what we're getting in the linear world on a per sub basis that we're also able to address a much much broader.
Part of a much larger share of the total population some of the markets and the traditional pay ecosystem. We were limited to 15 20, 25% of the market. So thats why youre seeing us continuing to grow through these trends.
Through this transition.
Super helpful answer thank you.
And your last question comes from the line of cartoon morale with RBC capital. Your line is open and you May now ask your question.
Good morning, and thanks for taking my questions. David You said in your prepared remarks that your goal is to compete against leading streaming services and not to win.
Pending war.
As you know a lot of the leading streaming services are ramping their spend levels more and more and on your end I think sooner.
And so that the fact that there may even be some content spend efficiencies than you previously expected. So I don't mean to belabor the point, but it is just top of mind for so many investors. So I'd love to get your perspectives on what gives you confidence that the DTC spend levels embedded in your targets remain appropriate and what seems like an.
Increasingly competitive streaming landscape and I guess at the core I'm, just trying to better understand how much of an internal priority. There is to hit the $14 billion in EBITDA and drive significant free cash flow versus maybe some flexibility for incremental spending investments to better position the company company could become a longer term.
Leader in this space.
Thanks.
When when you take a look at that at the premise of this deal.
The reason that we have.
We have a feeling but we don't really know in the end exactly what we're going to need to do and that's why I think having the free cash flow and the optionality and the ability to monetize across platforms is important having said that.
We are we want to compete against Disney a Netflix, but we're not we're very different company than the two of them those are two great companies.
Disney has a group has has a group of people around the world that absolutely love their product and they're doing very well Netflix has a very broad appeal product and.
And Ted.
And we are doing a wonderful job building out that brand. They have built the road of getting people comfortable buying content and consuming it on all devices.
We will have a very compelling offering so someone could have netflix and they will go there to what but we have very identifiable IP.
And much broader it'll be much much broader than than Disney and we're much we have much more identifiable IP and if you look at what Casey is doing with HBO. So he has he has euphoria right now we just had succession he has the.
The period drama Joe today at that age.
Boeing right now would would we do with HBO be doing a lot better if it had three.
More really successful scripted series at this moment.
It's not clear that that that they would be why it's sort of the example of if you took.
Food network and you said that we do 600 hours on food network, and we make and we nourish an audience and they are happy and they like it and they feel like that's their place and we make $400 million as an example, if we decided to do another 400 hours of content.
And maybe the audience would be a little bit happier.
Now we'd make no money.
And so when you put euphoria on and then that audience could then watch 90 day fiance and they could watch fixer upper.
There is a real balance of content here that we can go to and there is a lot of nourishment in our in our library together with a lot of shock and awe in the Warner Library and the shock in all together with the nourishment and the and the great personalities. We think is a really.
Pelling.
Menu and it's a.
It's a great recipe that we think we can we can lean into we're going to spend more on content, but youre not going to see us come in and go alright, we're spending $5 billion more.
Because the first thing we're going to see is we have so much rich content and so much nourishment as well as some.
So much content that that's compatible or reaches different audiences that they don't reach that the excitement is going to be when we come together.
Let's take this car out for a ride let's see how this does let's we're going to continue to spend but don't expect us to come.
To come out and go.
A couple of billion dollars more and off we go no we're going to be measured we're going to be smart and we're going to be careful.
But we are.
We're going to invest in these streaming platform, but that's not that's not our only game. Our game is to create a business that generates sustainable growth that is global in nature that generates a lot of free cash flow.
And we're quite confident in the numbers that we've given you.
If something changes in the next year and a half that we think theres a substantial amount of opportunity for long term growth and long term economics will come back to you with it but we're quite comfortable Gunnar.
No I think you said it all David and to the point about priorities. Our priority is on making the right decision and leaving no opportunity untouched, but we will make those decisions as David said in the interest of sort of the long term.
<unk> for the.
Firm here and long term sustainable growth so.
That's all I can say, but we will definitely touch every opportunity.
That's perfect. Thank you both.
Thank you and that concludes discovery, Inc. Fourth quarter 2021 earnings Conference call you may now disconnect.
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