Q1 2022 Warner Bros Discovery Inc Earnings Call
Begin momentarily until that time your lines will again be police and hold thank you and please convenient the same bye.
Okay.
Okay.
Yeah.
Hum.
Right.
Yes.
Hum.
Yes.
Hum.
Uh huh.
[music].
Sure.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Warner Brothers Discovery, Inc. First quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation.
There will be question and answer session. Additionally, please be advised that today's conference call is being recorded I would now like to hand, the conference over to Mr. Andrew <unk>.
Executive Vice President Global Investor strategy, Sir you may begin.
Good morning, and welcome to Warner Brothers discoveries Q1 earnings call with me today is David Zaslav, Our President and Chief Executive Officer, and Gunnar <unk>, our Chief Financial Officer.
Before we start I'd like to remind you that today's conference call will include forward looking statements that we make pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Forward looking statements comments regarding the company's future business plans prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations in providing projections and other forward looking statements. The company disclaims any intent or obligation to web.
Date them.
For additional information on important factors that could affect these expectations. Please see our Form 10-K for the year ended December 31, 2021, and our subsequent filings made with the U S Securities and Exchange Commission you should have received a copy of our Q1 results. If not please feel free to visit our website at IR Dot W. B D Dot com.
With that let me turn the call over to David.
Good morning, and thank you all for joining us.
Two weeks ago, we closed our transformational merger and began our next chapter as Warner Brothers discoveries.
As we begin the exciting work of bringing together the rich legacy of these two great companies.
Our mission is simple.
To be the world's best storytellers with World class products for consumers.
It's been fantastic to finally have the teams working together.
And I've loved having the opportunity to get time with the new leaders across Warner media as well as thousands of employees across key locations in the U S.
And I couldnt be more impressed by the strong sense of motivation and excitement.
An opportunity to unleash the potential of the combined talent pool of this new great company.
These last few months in our industry have been an important reminder.
While technology will continue to empower consumers of video entertainment.
The recipe for long term success is still made up of a few key ingredients.
Number one.
World Class IP content that is loved all over the globe.
Two.
Distribution of that content on every platform and device, where consumers want to engage whether its theatrical or linear or streaming.
Three.
A balanced monetization model that optimizes the value of what we create and.
And drives diversified revenue streams.
And four finally, durable and sustainable free cash flow generation.
Warner Brothers discovery emerges as a far more balanced and competitive company and.
And uniquely positioned to deliver on these four critical ingredients.
We have no religion about any one platform or window versus another.
And we intend to approach each and every decision through a lens of enhancing asset value against a set of financial returns.
Our goal is to maximize long term shareholder value and asset value.
It just subs we.
We will not overspend to drive subscriber growth.
Our focus is to invest in content and platforms that extend the life and return of our global IP.
And position us to drive greater returns out of each dollar of content spend than our peers.
And to ultimately drive free cash flow.
And we will refine our capital allocation and content windowing decisions accordingly.
We can maximize the distribution of our global IP in a number of ways guided by simplicity and choice for consumers.
In streaming we have a massive opportunity to reach the widest possible addressable market by offering a range of tiers, all with the most compelling and complete portfolio of content.
Our premium and attractively priced AD free Derek the consumer product.
A lower priced AD light tier.
We have had tremendous success with and is our highest <unk> product.
And in some very price sensitive markets outside the United States.
We can even offer an advertiser only product.
We have the ability to ring any number of cash registers.
Theatrical gaming.
Premium home video pay TV.
Free to air broadcast.
Plus screaming now with 100 million collective subscribers.
It is a growing and important complement to these existing and traditional avenues of monetization.
And represents true optionality that over time will drive our strategic decision making.
Given the depth of our content.
Decades of film and scripted and unscripted TV series.
Any of the most iconic brands and franchises, including half of the MGM Library.
Ported by a continuous pipeline of new production.
Together with the world's news leader CNN.
And a large international offering of live sports.
We have enormous flexibility in terms of how we monetize these assets.
We benefit from a deep history of World class content production.
Warner Brothers films.
Warner Brothers, TV and HBO.
True global leaders that are producing at scale.
True content makers.
Like Warner Brothers discovery, with an ability to produce and control the content IP <unk>.
Versus those that just write checks are positioned best to win.
As you've heard me say, we are not trying to win the direct to consumer spending war.
To begin with we firmly believe that to content companies coming together have unique advantages.
Including the largest film and TV library from Warner largest domestic and international lifestyle Library from discovery and significant global live sports and news.
This strong foundational offering.
To allow us to invest in scale smartly.
And we will uniquely position us in our drive to become a fully scaled global screaming leader.
We come into this transformational moment with great creative momentum.
To give you a glimpse starting with the global success of the Batman at Warner Brothers Studios.
Brothers television Ted last though.
And breakout hit series avid elementary on ADC, which was just renewed for a second season and of course, Chuck Lorre is unique and compelling content.
The HBO, Max which is on such a roll fresh off record viewing for HBO series Euphoria, winning time gilded age and Barry.
To hit Max originals, and just like that pacemaker and the flight attendants.
And in Europe , the Beijing Olympic games of discovery.
And Joe and the launch of Magnolia.
The 90 day is a real strong performer on Sunday night, just to name a few.
One of the Companys unique assets is the linear network group.
In 2021.
Taken together, we enjoyed the number one share in total TV total day in all key demos and people two plus.
And we have the greatest brands HG food HBO discovery CNN NBA March Madness, NHL Magnolia, the Oprah Winfrey network.
Our balanced verticals and content genres across scripted lifestyle sports and news.
Provide us with significant opportunities to not only cross promote for the benefit of the portfolio.
But also to offer compelling reach and targeting campaigns for our advertising partners.
I'll speak to this a little more in a moment.
This isn't just a domestic phenomenon.
In Latam for example, we are now the number one or two pay TV programmer.
In every market and we bolstered our position as the second largest broadcaster in Europe .
Again, we are excited about the strength of our sports portfolio and the Optionality. It gives the new company.
We enjoyed our exciting March madness and final four.
NBA regular season, and what looks to be a strong playoffs at Turner.
And capping off our first season of the NHL and playoffs.
Major League Baseball has just started to come together, while having just completed a robust Olympic games in Europe as I noted.
Lastly, C. N N is once again setting the standard for groundbreaking and journalism first news coverage during.
During critical moments the world turns to CNN.
At its core CNN is the nation's premier news outlets and has the number one digital news servicing United States with 35 million unique monthly users.
The heroic reporting out of the Ukraine reminds us all that CNN is the world's most impactful news platform.
And for Us.
True reputation will asset.
From a management perspective, we have brought together a strong leadership team in.
And a streamline structure to foster better command and control and strategic clarity and coordination across the entire company.
We've just begun to hit the ground running with the teams and the broader organization.
My focus is to foster a culture of collaboration and to embrace a singular focus around being the top home for the best and most diverse talent and creators to bring their stories to Warner Brothers discovery.
We will have our head down across the company and we will have a more formalized and detailed outlook across our businesses to share in the coming months, though in the course of initial planning integration and synergy capture early action priority items for me will be.
The upfront.
Like with Scripps we are fortunate to have closed the transaction in time for this year's upfront marketplace.
We expect our presentation on may 18th to be an important opportunity for the company to share the full suite of our combined network portfolio, the top talents and personalities within the family and the breadth of genres across series specials news sports streaming and the best lifestyle content.
In the world.
The combined strengths of both organizations client relationships advanced advertising programmatic.
Sponsorships and direct to consumer AD like streaming services all position the company with a unique hand.
I have personally spent quite a bit of time with key advertisers and agencies.
And I am so impressed with the combined capability of our platforms and our ability to uniquely serve the needs of our clients <unk>.
Including integrating sports alongside our broad entertainment offerings.
One offering where before it was discovery Warner and sports now as one.
It's simpler and provides more value to advertisers.
In many respects we are building upon the momentum that John Stein Mart is built with premier.
Bringing on duplicated broadcast equivalent reach.
And greater share to advertisers, helping us to secure a greater share of revenue.
I remain very enthusiastic about the upside here and this multi year opportunity.
Direct to consumer.
<unk> and his team are deeply involved in the early integration phase and go to market plans, having had very little interaction across the organizations during the pre closing period.
This will take some time, though key steps to identify and analyze technology proficiencies subscriber concentration and overlap.
Content opportunities marketing and pricing strategies are all underway.
Content.
Kathleen Finch on the network side, along with Casey Channing and Toby are assessing the opportunity across the entire organization.
And they are significant.
As drivers of both more efficient spend as well as revenue upside.
Like direct to consumer we'll have more to say in time, particularly on windowing as well as content sharing.
And finally synergies we have been working hard for months.
And are now validating and executing against those 200 plus work streams.
The attack is strategic.
Operational.
Structural and financial.
We will clearly take swift and decisive action on certain items as you saw last week with CNN, plus while others will take time to formulate appropriate action plans.
We have detailed a $3 billion plus cost synergy plan.
And we're already on our way with coordinated efforts from our transformation office as to the waves of which this will unfold.
Just 18 days in we are as enthusiastic and excited as ever with the opportunity ahead to integrate and drive the new Warner Brothers discovery.
The leadership team is locking arms on our integration plans and long term growth strategy.
And we look forward to providing more detail on each of these in the coming months.
I'll hand, it over to Gunnar after which he and I will answer some questions.
Thank you David and good morning, everyone, what an exciting moment, it's great to finally be able to tackle the challenges and embrace the opportunities ahead as we begin the hard work to integrate Warner media and discovery.
Please remember that today's call is predominantly meant to discuss discoveries Q1 operating performance.
As you know our merger with Warner Media closed just after the end of Q1 on April eight.
So to the extent possible at this time I will share some reflections on our early observations as well as Warner Media Q1 results that AT&T is closed last week.
Starting with a quick review of Q1 results for discovery stand alone.
Discovery's first quarter U S advertising revenues were up 5% year over year.
Our next Gen advertising products like discovery, plus and go performed well and we continue to see positive impact from last year's upfront, which helped to outpace delivery declines on the linear side.
While the scatter market continues to be solid with pricing up over 30% versus upfront visibility not surprisingly continues to remain limited given the current macro environment.
For us categories like auto technology, and CPG are weaker versus last year, while travel entertainment and retail remain healthy.
U S distribution revenues were up 11% year over year, largely driven by the growth of discovery plus subscribers throughout 2021, while linear affiliate revenues were also up year over year as rate increases continue to outpace subscriber decline.
Our fully distributed subscribers were down 4% as where total portfolio subscribers when correcting for the impact of the sale of our Great American country network in early June last year.
Turning to international which I will discuss on a constant currency basis.
Advertising grew 11% in the first quarter in part helped by the Beijing Winter Olympic games, as well as underlying momentum in certain key markets, such as the UK, Germany and Latin America.
That said, we did begin to see some limited impact from the conflict in Ukraine towards the end of the first quarter in markets, such as Poland and Germany.
As well as some macro headwinds similar to the U S.
While visibility remains limited in certain key European markets. At this moment, we expect discovery Standalone international advertising revenues to grow in a similar fashion with Q1, excluding the Olympics impact, which was a nice positive at the moment, we're pacing up low single digits.
Distribution revenues increased 8% during the quarter largely driven by continued growth of discovery plus you'll note that we did not launch any new markets during the quarter as we previously outlined and in line with our strategic thinking coming into the closing of the merger.
On the linear side, we continue to see healthy growth in Latam, while pricing pressures in certain European markets remain a headwind.
This also in part reflects hybrid affiliate deal structures, which balanced affiliate fees and DTC distribution.
Furthermore, note that revenues from our Russia, JV, which we announced we had exited a recognized as distribution revenue. This resulted in a 100 basis point drag to distribution revenues during the quarter.
I would also note that discovery has exposure to Russia, and Ukraine in total is less than 1% of revenues in 1% to 2% of <unk>.
Operating expenses were up 11% during the quarter, primarily due to the Olympics.
Excluding the impact of the Olympics opex declined by 2% year over year as lower marketing costs as compared to the elevated discovery plus large spend last year were partially offset by higher content costs across our portfolio.
Net net we finished the quarter with $1 3 billion of <unk> up 23% year over year, including a small negative impact from the Winter Olympics, and roughly $170 million of investment losses.
Net income for the quarter was $456 million, resulting in GAAP EPS of <unk> 69 per share now.
Now turning to some housekeeping items to consider for the quarter as you update your models.
First we recognized a <unk> 58 per share gain from the $15 billion notional interest rate hedges that we implemented last year. We unwound. This hedge in mid March in conjunction with the successful closing of our $30 billion debt offering.
Second the impact of PPA amortization during the first quarter was <unk> 49 per share as I mentioned on our last earnings call, we decided to take a more conservative position and accelerate the amortization of purchased customer relationship intangibles. As a result of this our Q1 DNA expense increased by $164 million year.
Over a year.
Adjusted for the two items I noted EPS would have been 60.
Per diluted share.
Yeah.
Turning briefly to the Warner Media results at AT&T reported last week, which I would note is based on how AT&T has historically reported the segment and.
Whitfield not necessarily tied to carve out financials or how we plan to segment the business going forward.
We are working on Q1 part of our financial for Warner Media as well as updated pro forma financials for Warner Brothers Discovery, and we will have those disclosed before the end of the quarter.
Sticking to the reported numbers for now.
Underlying performance at HBO Max during Q1 was healthy with growth of $3 million net ads, reflecting continued strength of the programming slate in total together with Discovery's 2 million net adds the pro forma company added 5 million paid subscriptions during the quarter, adding.
Adding the two subscriber basis, we ended the quarter with just over 100 million global DTC subscribers.
Please note that we are still working through alignment of our subscriber definitions and the focus of our subscriber reporting going forward after which we will have a more refined a detailed update when we report second quarter results.
However, the operating result, as you have seen were down and Warner media first quarter, a 33% decline versus prior year to $1 3 billion.
Free cash flow was down even more declining by $2 6 billion versus prior year and more importantly significantly negative in absolute terms again. This is for Warner media in the AT&T segment structure and includes elements that are not part of Warner brothers discovery going forward.
In my mind, there is both good and bad news in these results.
Starting with a bad news Q1 operating profit and cash flow for Warner Media were clearly below my expectations.
And given that Q1 performance and previously unplanned projects in flight I currently estimate the Warner media part of our profit baseline for 2022 will be around $500 million lower than what I had anticipated. However, with a positive offset of a couple of hundred million dollars on the discovery side of the combined company.
Opening leverage as a consequence of this while still dependent on working capital adjustments that have yet to be finalized is likely to be a notch higher now estimated around four six times give or take and still well below the initially modeled five times.
Net being the first year of our integration and as we've explained all along 2022 will undoubtedly be a messy here. So a lot of moving pieces and now a somewhat less favorable starting position in Q1.
The good news on the other hand is that I also see more opportunity as I work through the numbers there are certain investment initiatives underway in plain sight, but I don't think have attractive enough return profiles as such and with our new combined leadership team in place out of the gate I feel very confident in our ability to rectify some of the drivers behind the business case.
<unk> and Tom very quickly with the CNN plus decision last week being exhibit a.
And while we're still early in our integration process and are still at the beginning stages of initiating our synergy as well as strategic and financial planning, we feel more confident than ever about achieving our $3 billion cost synergy target and believe there is a much greater opportunity off of the current baseline at that target will ultimately prove conservative.
And to be clear, we remain fully committed and reiterate our financial targets for 2023 and I remain very confident that we are on track to achieve our target gross leverage of two five to three times at the latest 24 months. After closing we're refining a more detailed bottoms up combined budget and long range plan.
The key in type of which we look forward to sharing in the months ahead.
Prior to that I wanted to share some high level priorities that we're digging into early on as well as some initial financial and operational observations since close.
Number one content I'm working very closely with our creative and financial leadership teams to examine the totality of our $23 billion plus of annual content spend to analyze the ROI of each dollar spent.
Youll have as exercises not to identify ways to reduce what we spend on content, but to harmonize processes and analytics, so as to be more consistent and efficient in how we allocate our content spend across the entire global portfolio to optimize returns.
Second marketing.
The combined company spends more than $5 billion each year on marketing and that doesn't include the opportunity cost of cross promoting assets across all of our platform.
We intend to drive for the highest level of financial discipline here to make sure that every dollar spent is purposeful and measure.
This will prove to be an enormous opportunity for cost synergy capture across the globe and within each and every business line given the significant overlap geographically and operationally.
Lastly, working capital since I joined discovery five years ago, a key focus area has been to improve working capital efficiency.
This has been a critical part of a formula that has led to our free cash flow conversion rate being among the top end of our peers.
<unk> I believe we have a tremendous opportunity to continue improving working capital efficiency at Warner Brothers discovery operationally and structurally and this will be a key ingredient in achieving our free cash flow conversion rate targets.
As I stated at the beginning of my remarks, I am invigorated by the opportunity ahead to build a unique and truly remarkable media company centered around unparalleled IP and a balanced monetization model to drive sustainable profit and free cash flow growth.
We're only 18 days in <unk>.
And are still in the very early stages of integration and refining our long term strategy and we look forward to sharing more about our plans in the coming months.
The new combined management team is completely aligned around our philosophy to manage Warner brothers discovery with the highest level of professionalism with diligent analysis and decision, making accountability and overarching coordination of our balanced portfolio of assets in the best interest of the company focused on free cash flow and firm value more than anything else.
Now with that I'd like to turn that over to the operator, and David and I will be happy to take your questions.
Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone keypad until we draw. Your question press the pound key in the interest of time, please limit yourself to one question and one follow up your first question.
Comes from the line of the di giant with Evercore ISI. Your line is open.
Good morning.
Just wanted to get some perspective, obviously.
<unk> made some decisive decision on the CNN plus you know shutting down are there a lot more opportunities across the Warner brothers businesses that can result in material savings of costs going forward that you've sort of seen that.
Could help the long term cash flow story.
And second just for Laguna in terms of.
Working capital and free cash flow, obviously this year, there's going to be a lot of puts and takes with cost to achieve and in fees and so forth and also the adjustments that came through the transaction.
With one of others, I think a bit too.
$2 5 billion less than the original deal pricing and any sense of all the puts and takes that can help us with what the free cash flow trends can be given where you're starting from.
BJ.
Let me, let me start with the last one because I want to be clear, we're still working through our opening balance sheet and theirs.
Working capital adjustment work, that's still in flight and I prefer to discuss the details of that.
These results and we have all of that fully baked and audited.
And hopefully a few weeks here, but I think the bigger the bigger picture here is that as we've said.
'twenty two is going to be noisy and you've mentioned some of the factors that are going to flow through but if I take a step back here and just look at let's call. It the past 15 months for Warner Media.
Carve out group.
Looking at more than $40 billion of.
Revenue in really virtually no free cash flow and right or wrong management has made a decision to invest a lot of the incoming.
Funds into a number of investment initiatives and as I'm looking under the Hood here again CNN plus is just one example, and I don't want to go through a list of specific examples, but theres a lot of chunky investments that are that are lacking what I would view as a solid analytical financial foundation and meeting the.
Roy hurdles that I would like to see for <unk>.
Our major investments and so we're we're this is an opportunity where we're going to be able to continue the initiatives that make a lot of sense and reallocate some funds or dropped some cash to the bottom line, but it's an opportunity.
We're in the process of working through that and as I said 2022.
Very much it looks a little messier than probably what I had hoped for but for 2023 I'm more encouraged than ever and I think it's going to be very clean another area.
You may have picked up from David a minute ago is that at this point if not being religious.
About any of these decisions, we'll make our decisions.
Decisions on the basis of the data that's available.
And clean financial analysis, and I think there's a ton of opportunity.
An example of that is we're not going to be in a particular country for a period of years, we could monetize that we should be monetizing our content as we've taken a look at the subscription platform.
And looking at HBO, Max which Casey is doing such a great job with we're looking at the data and you could see that there's a huge amount of content. When you look at the the wealth of the television library in the motion picture Library, that's not being used at all.
On the subscription platform. So basically what content is being used and valued on a subscription platform. How do you enhance that and drive that together with our existing content to reduce churn and drive growth and what is not being used on that subscription platform and how do you monetize that in a way that's meaningful everything should be monitored.
We own more content more compelling IP than any other media company in the world.
We have a strategic focus on it.
Our global platform.
It reaches people either through a subscription only or add light.
But ultimately whether it's through our existing platforms or through Avon we.
We should be monetizing all of the great content that we have.
Great. Thanks, so much.
Next question.
And your next question comes from the line of cut good morale with RBC capital markets. Your line is open.
Good morning, guys. Thanks for taking the question I wanted to talk about streaming the markets enthusiasm for the streaming business model has tapered off somewhat following one of your larger peers starting to see a notable deceleration in growth and calling out a number of headwinds that they are seeing their subscriber trends and it's interesting to me because.
On the flip side, you're more transformational and exciting days are probably still in front of you under your new combined portfolio. So I think for all of US It would be very helpful. If you could help frame the opportunity you see ahead with streaming once more and whether or not we should be thinking about HBO, Max discovery plus services a little bit.
Differently than some of your peers and if ultimately your views on your DTC subscriber or RP trajectories have meaningfully shifted given what we're seeing elsewhere in the ecosystem.
Thanks, So much look I think it's a big benefit that we're fully diversified company with a largest maker of content and whether it's Ted LASA or we have over 100 series that we're producing.
The more than 50% of those are for third parties and we're generating a lot of revenue by being a great producer and maker of content.
In addition, we have our traditional business, which is which we're we're outperforming and we're generating a lot of free cash flow, having said that.
<unk>.
The idea of discovery coming together with Warner with all of this great IP and being able to reach above the globe.
From my perspective remains an even bigger opportunity.
You take a look at what Netflix has done over the last several years and with Disney has done they have.
Loud a path.
Behavior really people have gotten acclimated to buying content, they've got acclimated to watching content on different devices had to move content around and here comes this new company.
With a with this lane and.
And it's why the Middle Lane is wide open for us to accelerate with the broadest and most compelling IP in the world.
Whether it's D C or antibody bearer Looney tunes, a Harry Potter game of Thrones HBO and so we put this all together together with what we have at discovery and when I say, we're going to be disciplined.
People are spending hours a day with discovery plus.
We have content a huge library about as big as Netflix.
Put that together with the shock of HBO Max and the first question for Us is.
That looks like a pretty combustible compelling broad offering in Europe . Its sports it's non-fiction it's entertainment, it's HBO to get here in the U S. It's all of the content, which many months with a leader for women in the U S. With what we have at our product is very low churn. So we start with I think.
A very differentiated very broad very compelling offering that has IP that people know and thats attractive to everybody in the home.
And our data says that the more people that use it the more often they use it.
The higher the growth and the lower the churn and so were very enthusiastic about driving down that lane with with our add light and subscription service.
But we also.
In this moment of uncertainty.
Feel very strongly that this diversified company is going to give us the ability to have that conviction and to have that discipline, because we're generating huge free cash flow.
I've been at discovery now for 15 years and for those of you that have followed US. We're focused discovery was a free cash flow machine, we were generating over $3 billion in free cash flow for a long time with investing in our new media.
Which we did successfully and.
And we learned a lot.
We still were generating almost $2 5 billion of free cash flow now, we look at Warner generating $40 billion of revenue and almost no free cash flow.
With all of the great IP.
That they have we bring this discipline and this focus on what are we investing in are we.
Investing in assets that are in.
In investments that are going to generate real return is this going to help our subscriber growth is this going to be helpful to us on in our platforms and we think that there's a real opportunity for US, yes look up maybe cooking just to add from a financial model perspective, all we've seen over the past 18 days.
Part of the thesis that we had developed jointly.
Through the course of the.
<unk> originally.
No change there if anything.
Maybe more enthusiasm around so the ability to control one of the most important metrics, which is which is churn.
By the combination of these two phenomenal content portfolios and the great work that the teams are doing here.
Just to.
And so theres bought a question about the streaming business model remember that as we as we've been saying all along a lot of the synergy potential is really going to come from cost avoidance and elimination of planned expenses for the streaming business. So I do think I continue to see a very very attractive return model here.
That's great. Thank you, both and I'm, sorry, if I could just squeeze one more in I realize it's still very early days, but now that the deal is closed can you talk maybe a bit more about top line synergies.
When you think about the combined company's scale in IP portfolio, it's fairly massive so it doesn't really take a lot of corrode estimates across potential upside to linear advertising to affiliate fees to GTT to come up with a fairly needle moving total topline synergy number maybe I don't know one or $2 billion. So any updated thoughts on the <unk>.
Opportunity with the topline synergies and the path to get there. Thanks.
Thanks, so much.
In the models that we've shared with you we don't have any revenue synergy in there I think it's opportunistic that we closed in advance of the upfront.
But it's also opportunistic that we have a together we have a scaled product and we're in the market already within add light products were the ones that were out there very early saying add light looks really compelling because it is a great consumer proposition.
Our users the churn was very low day to day, we were doing between two and four minutes of advertising and generating $5 $6 in incremental revenue and as it scaled we started to make more and so we said very early on we're going to switch to offer consumers what they want.
Our lower priced opportunity.
With a small number of advertising. In addition, we're in the business of selling advertising, which gives us a great advantage, so as others and I expect they will over the next couple of years get into the streaming AD light business.
Many will not have the infrastructure of teams locally on the ground or the ability to package.
A all the channels of free to air channels and markets across Europe , together with that type of inventory and finally, we.
The opportunity of putting these two companies together and I've been meeting with the top agencies last week and this week with the Bruce Campbell and with John Stein loss.
And we're talking about this exciting opportunity of what we bring to the table now.
Leader in live Sports news and entertainment and lifestyle taken together, we're bigger than any of the broadcasters and so if you lay out.
The four broadcasters or you say now who the five leading players in primetime in America.
By any measure in terms of reach the ability to get demographics, the quality of the IP the amount of live content the amount of sports.
We're in the top three and by some measures we're number one and so I think that ability to offer that bouquet.
Every advertiser wants something different who wants more sport or more entertainment more news, but sport for us, particularly where all the sports are locked in for the next several years next year for the first time all of the playoffs and the Stanley Cup of hockey.
We will be on TNT.
And you have the NBA finals TNT.
You have a baseball TNT March madness TNT and.
We love that and we've been we've been driving that hard.
To create value for advertisers throughout all of Europe .
So we hit every demo and in terms of scale.
An opportunity for advertisers.
Were very strong we have the NBA playoffs and finals.
But the net net is the advertisers we've spoken to and agencies are very excited about having this new fifth player in prime time, and we would argue.
The number one two or three player in prime time.
And the same is true for us scaling outside the U S to provide more opportunity to advertise.
Let's take next question please.
And your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities. Your line is open.
Thank you I have two questions on can you talk a little bit about.
I guess it does.
There's no secret that there were tons of inefficiencies at the altar of Warner media. So how are you approaching the incentive structure under your management team versus prior.
Prior on US that's question one and then I know you talked a little bit about advertising, but can you talk a little bit about the approach. It's at scale, yet, but you talked about but you also have a broader array of assets from what I recall some time with you all the time Warner days.
This is sports, but never sold with entertainment. So it seems like the first time all of these assets will go under one sales team.
And also you'll have more.
Like more platforms to sell I guess, you're selling it sounds like you're saying the advertising for TTC within <unk>.
All of this I think upfront so.
Can you just talk about that in your approach. It obviously will show up in Q4 of this year.
But any opportunity even before that in scatter. Thanks.
Thanks Jessica.
So youre right I mean, it was a number one thing is how do we service clients with simplicity one stops.
And so.
We've restructured.
And in these advertising facing meetings, we've already gone out.
Two agencies and advertisers and it is it is simpler because it's it's before it was sports. It was it was it was Warner Entertainment and it was discovery now it's all in one and as you said, we also have all of this digital inventory, which is in great demand, whether it's bleacher whether.
CNN Dot com.
Which is the largest dot com the largest site for news and America.
Together with the AD light product on discovery plus together with the.
The AD light product with HBO Max.
And all of our other digital assets. So it's one place to get the broadest demographics and all the different types of content that an advertiser can one in dialogue and Bruce can sit down with an advertiser and and address really whatever need they have but sit down at the table as as the law is having the law.
Just.
Reach out.
That will close in the marketplace and the broadest <unk>.
Scale of diverse content so.
I think it puts us in a very good place to service advertisers.
No incentives on your on your first question Jessica we're obviously.
In the early innings here, but one thing that I.
Can clearly say is that we're going to set incentives that are reflecting the balanced nature of their your portfolio.
As opposed to for example that are accent advising everyone across the company just for a subscriber.
So we got to reflect the the best interest of the entire corporation in incentives and make sure that people actually have an ability to impact what they're what they're getting paid for and one theme that I think is going to cut across here is that we'll work hard on on coordinating across the different business units to make sure that.
Assumptions.
Tie ins.
Into each other as opposed to sort of.
Our focus on individual business unit, there is going to evolve.
Over the over the course of the next 12 months, but that's sort of the high level philosophy here.
And going to can I, just ask a quick follow up when you said that there was a shortfall in the part of Warner media, a $500 million, where where does that come from.
Jessica as I told you we're.
Everything that I'm, saying here is on the basis of what AT&T disclosed publicly and then some internal management reporting I do not have sort of a a fully audited set of Warner media financials, I don't want to go into any kind of detail here, but it's.
Just take that.
Aggregate.
Operating profit number.
And that's essentially $500 million lower.
What I'm seeing today for the full year than what we are what we put in our management case that was disclosed in the S. Four.
Just one follow up that I think is going to be interesting for next year in terms of sport it'll be it'll be the first year that all of the playoffs for a for a major U S border on cable.
The hockey will be on ESPN and will be on TNT.
That's all of the playoffs will be on us at this point.
Yeah.
Thank you Hi quick.
Quick question. The next question is from vessels.
Our next question comes from the line of Bryan Kraft with Deutsche Bank. Your line is open.
Hi, Good morning, I had two if you don't mind. So first just wanted to ask you about the timing for the relaunch of your direct to consumer strategy and products is that something that could happen by the end of the year and in the meantime, how are you managing that business or are you going to continue to invest in marketing and growing HBO Max.
Or will you be taking your foot off the gas marketing there and then separately just wanted to ask you how you're thinking about the challenges and the opportunities presented by account sharing do you see the kind of opportunity that Netflix season, tightening that up and trying to monetize it.
And that you need to focus on in the next couple of years is that something that is maybe more of a longer term focus for you. Thank you.
Yeah, Brian So thank you so look when it comes to the timing for the relaunch again I don't want to.
Make any any new commitments here that the team is working hard right now.
As one combined team to hammer out the exact cadence here and we will come.
Come back to you all once we have a fully baked a firm plan here what I can say about the interim period here is we're not we're not changing our mindset. So the priority for the team is to rally behind that integrated our product and at the same pool will continue to be very thoughtful.
About our spend we will we will not launch any new markets.
For the time being we will not to chase aggressively.
Subscriber growth as long as we are working on this.
Priority, one which is getting these are getting these products together that said.
All I've seen so far.
It makes me very very enthusiastic about the opportunity of the combined product.
A great cadence of content coming to the market here household Dragons.
For the third quarter.
I think theres going to be excited.
Exciting global phenomenon phenomenon, so feel very good about it but we will continue to be very thoughtful as we have been.
Going into this into closing this merger here.
Its mission central.
We think these two.
Both of these products together the bouquet of content that we provide.
The wealth of content the diversity of content the content, that's known around the globe as soon we believe that that's going to be a combustible.
Product that we could really drive around the world and so the sooner we can get at launch, but we want to get it right is critical because.
It could have.
A record breaking number of people watching euphoria, but we want to make sure that when they finish euphoria. If we have the goods. If we have all this great content on that we are ability we have an ability to recommend to people. You just finished euphoria here's the other eight shows that you would love, whether it's chip and Jo whether it's Oprah.
Whether it's 90 day fiance, or weather or whether it's mix or or or.
Another great HBO Max series, but we have some work to do on the platform itself.
It will be significant but we also think that one of the big opportunities here is going to be churn reduction theres meaningful churn on HBO Max.
Higher than the churn that's all that we have seen and so the ability for us to come together.
As part of one of the theses here that managing churn and we've seen this because we've been added in Europe for eight years as you begin to manage churn in a meaningful way.
That provides.
Real.
Real meaningful growth.
And then maybe Brian on the password sharing point of as you may have heard before both from us and MDM. It.
It feel Max team, but theres a process in place there is a dedicated team and I would just say that this.
This is not a rapid problem here.
In fact, I think it's a it's a small a small number of cases, where we see a high risk of that.
Sharing activity happening.
Yeah.
Great. Thank you.
And our next question comes from the line of Rich Greenfield with Lights had partners. Your line is open.
Hi, Thanks for taking the question.
You know Theres, a quote David from former HBO CEO , Richard Plepler that more.
More is not better, but better is better and I know you've sort of talked about you are not trying to win the sort of content production arms race, but as you sort of think about the HBO Max strategy.
Does broadening HBO to HBO, Max even makes sense.
H B O just stick to the HBO ethos of like we all know what an HBO show is.
Succession should it be brought or are you just mentioned things like 90 day fiance et cetera.
Should discovery and C N N content really being there or as HBO, such a great product as it is that expanding it to be more actually doesn't make sense I'd love to sort of just how do you think about that and how do you evaluate especially given what just happened with.
Netflix and Disney both sort of realizing they have to do advertising and that.
Some of their content may not be generating the type of sub growth that they had hoped for previously.
Thanks, Rich it actually makes every sense because what you need is a diversity of content for everybody in the home.
And they may come in for you for you, but our research shows that people watch your for your favorite.
Favorite second shot to watch his 90 day fiance, so having a diversity of content is a reason why people are spending hours with discovery, plus because theirs and they watch discovery plus at different times of the day, but the same people that are watching Julia.
<unk> New series are watching gilded age that turning around and they're watching Big Bang theory, and then watch with friends. That's why HBO. Max has has been able to continue to grow so aggressively and so when you put all of this diversity of content together this content for kids this content the teens, it's basically ever.
And the family why would you go anywhere else we have all the movies, we have all of our library content that you want and I think better is better that was the point I was trying to make that if we have it.
If if casey in the HBO team, who I spent a bunch of time with this past week.
Strong narrowly talented team they've been together the leadership for more than 15 years all of them they have a system.
It reminds me of a.
Of the Disney.
Alan Horn, Bob Iger.
The way that they were able to really outperform the market Kevin <unk> Kennedy they were able to outperform the market.
Motion pictures for a period of years, if you look at the way they focus on quality, whether it's Julia.
Winning time gilded age euphoria flight attendant and just like that Barry They just launched.
This is an ability to really one kind of the cultural importance in the idea that just doing more shows look at HBO right now what it really needs. This is precisely what we have is that when they're finished with watching winning time. They can go and watch friends and watch.
Bang and watch their favorite movie.
We'll go over and watch Oprah will watch some TLC shows just for fun.
So we believe and we see this in Europe , where we tried to offer we thought that the answer was just to offer niche high quality that you get high quality shocking all content together with a lot of nutrition in our case in Europe , together with sport and you offer something that everybody in the family.
Users and the churn goes way down it's much harder to churn out of a product when your kids use it or your significant other uses it or your mom and dad are watching but also if you find yourself watching it more often so I think it is precisely why we did this deal.
Everything tells us that it's going to make us stronger and more compelling because of the the the breadth of the.
Quality menu of IP that we have.
Yeah.
And as you think about that how does that impact the <unk>.
Obviously as the streaming product becomes more robust and you put more of our energy there how should we be thinking about what happens to the trajectory of sort of Turner discovery of the legacy cable network business like how do you balance that the decline of that business versus the growth of the other like especially I know, it's 18 days, but how are you thinking about that sort of trade off.
Well first of all.
We've been growing our traditional business.
We recognize that that.
4% of subscribers are down and viewership on the platform is down but when our competitors are taking content off constantly have that platform. It gives us an opening for us where we're doing a lot of original content on we're obviously all original at CNN Sports is live in tune in and then we're doing original on.
Food on home on discovery, and so and we see it outside the U S.
Long term, there's no question that the business is challenging but <unk> are increasing advertisers still are looking for they are chasing and chasing for inventory because it's the most effective inventory and long form video and look remember broadcast for a period of 20 years was declining and Cpm's were increased.
I was at NBC in in the mid in the mid Ninety's. When Welch was saying this can't continue we can't cab smaller and smaller audiences and make more and more money and I think he was right or maybe he'll be right eventually, but it's almost 30 years later and the advertisers are still paying more than the hurdle rate of decline so.
We will be leaning in with efficiencies and effectiveness to our traditional business, which we think which generates an awful lot of free cash flow will be leaning in as a maker.
Warner Brothers television, where we're selling we're an arms dealer and we could sell content and we're selling.
Because we are the best producer of content, we're selling content and getting prices in bidding wars to get that content.
We'll continue to do that.
And then write down that Middle Lane will be building that important.
Growth engine of <unk>.
Starting with HBO, Max and discovery, plus what we have across Europe .
And finally, I'll just say that.
That traditional platform.
The other night during the playoffs, we reached more than 50% that people that were watching television across our platforms.
Gunnar said Theres a lot of money being spent to try and reach an audience. We now have the same level or in many cases, the largest reach on television in the U S and the ability to use our inventory our own inventory to promote to and from all of our products and the efficiency of doing that in a cost savings of doing.
It I think is a is a big plus for us.
The one thing I would add rich is just from a financial perspective.
A hand that I would not want to trade with anyone else in the industry fee. The balanced portfolio has so many built in financial hedges again I happen to believe that the linear platform is going to be around and will coexist without other platform very very long time, but you know should it change with that trend accelerate.
Positioned with.
More than 100 million homes on the on the direct to consumer side should we see more price inflation on the content.
<unk> will be benefiting from that with <unk>.
One of the top television studios in the World. So there's a lot of.
Flexibility and I think it's anyone's guess, how some of these trends are developing but I think we're as well positioned as anyone in this game and is the largest maker of content. We can change strategy. The world is changing if it turns out that producing more content for ourselves because we're accelerating down that middle lane as a global direct to consumer.
<unk> business.
We're not going to have to go right a lot of checks to others to get the best content, because we have the factory.
Thank you very much guys.
Enter your last question comes from the line of Stephen Chahal.
Wells Fargo. Your line is open.
Thank you.
I just wanted to ask about a couple of Warner media assets and sort of take your temperature on on how Youre thinking about what you can do with them. Maybe first is on the DC universe that seems like just an asset that's been under managed by Warner, especially vis vis what we've seen from some of the peers like Disney. So just wondering if you've had any time to get under the Hood on D C.
And how you think about you might be able to use that with some of your global ambitions are little more successfully than than the predecessor management team did and then with CNN you've shutdown CNN plus we've seen this week that there are folks out there that will pay a lot of money for news and news type platforms. It doesn't seem like.
News is something that scales globally. The same way you talk about a lot of your other businesses and content. So I'm just curious how core we should think about CNN within your long term strategy.
Thanks Steven.
Well first let me start with with news and CNN the great.
I Love the news business, we love the news business CNN as the leader in news.
They are a leader in global news that the best journalistic organization in the world, which they're showing we've got a great new leader, Chris Licht, that's going in there we're fully committed to it and we think that is.
If you look at news around the World, It's never been more important during.
Here in the U S and around the world.
Mostly advocacy networks the ability to provide journalistic.
Great journalism and facts.
Those two elements are the foundation of.
A civilized society, we need great journalism, and great facts to make the right decisions.
And advocacy networks that make a lot of money by by generating and supporting an audience is a great business, but CNN as is in the business of journalism first and that's what that's what we're going to fight for but it's also <unk>.
As importantly, it's a really really good business, because we own it when it comes to that.
The entertainment business, whether it's D C a harry Potter or antibody era, those that's IP that we own when it comes to sports, we're very careful about sports and.
The TNT and warrant and and Warner team was clever about getting long term rights, which we're going to get a lot of benefit from but sports are rented.
And news is scalable we are already in Europe and the ability.
The ability to take CNN around the world more aggressively and own that and the value of that because when people get up every day, there's lots of entertainment content, they want to see but as as human beings. We wake up are we okay, and then what's going on in the world and being able to own that with the greatest brand in new.
<unk> is really compelling and so we're committed to it we think it's a differentiator we see already in Europe that when we put it together on ours on our subscription platform that people come to it often it reduces churn and it increases appeal and so.
And finally I think.
C N N dot com is a new media asset people were looking at news on their devices.
And we're the leading place that Theyre going for news, we're pushing breaking news to people on their devices on every device.
And that creates a real connection when people see CNN and they see that on their device, it's meaningful and so.
Chris is going to start a journey in the next week or two.
I'm watching CNN I think we all are.
And.
It's it's a treasure and what Ted Turner tried to create is something that is.
Is is really meaningful and we take that seriously and.
It's a solid moment with with the war in Ukraine, but ultimately when they reward trials.
The exhibit a b C and D will be the great work of the war correspond instead of risking their lives to <unk>.
Get what's going on there on video.
And and and in camera and it's probably what differentiates this war from almost any other and it's probably one of the reasons why it's galvanised NATO and galvanize the world on what's going on because of the work that CNN is done. So we're fully committed on on D. C. I would just say, we think that that D. C is in <unk>.
Gordon Aerie opportunity.
Batman Superman two of the biggest brands in the World, maybe one and two maybe one and three.
So I think there's over 100 characters.
And.
Let's just say that we're going to focus very hard on building a long term plan Batman was just very successful.
It was also very successful on the platform when it dropped this past week.
Which I think is it's just one piece of data, but it is a very good sign I've been saying for a very long time owning Warner brothers motion Pictures together with the streaming service together with a with a big factory maker of quality content and Warner Brothers television together with the largest traditional media business.
Global business is it is a is a great recipe in a very balanced attack, but there was question about weather opening a big movie should we really collapsed the entire motion picture business on streaming.
And I think I've been saying no, but I think now the data is starting to show.
No way.
When when you when you opened something when you opened a move in in the theaters.
It has a whole stream of monetization.
More importantly, it's marketed and it builds our brand and so when it does go to the streaming service. There's a view that that has a higher quality.
That is that benefits the streaming service and so that's been my theory.
I think Batman. The early data is that Batman did extremely well and generating viewership and generating <unk>.
Interest, even though it was in the most in the movie theaters first so I think that's a great sign for the motion picture business.
I think the motion picture business is still where you tell youre. The most compelling global stories, because you with other people and it's that big screen and its magic and and it also gives us a chance to attract.
The greatest and most compelling talent.
Because that's a fight over it at the top of the ecosystem and that's the motion picture business and we have Warner brothers and so.
We're excited about it.
Yeah.
Thanks.
Thank you that concludes Warner Brothers Discovery, Inc. First quarter 2022 earnings Conference call you may now disconnect.
[music].