Q2 2022 Warner Bros Discovery Inc Earnings Call
No one has a better hand than we do.
Second we will maximize the reach engagement and overall value of our content to a broad distribution and monetization strategy.
Our job is to tell great stories and to bring them to as wide ranging and audience as possible in as many ways as possible.
And to deliver the greatest viewing experience possible.
Certainly technology plays a big role in this.
And we still have a lot to learn but it's equally important that we be flexible and agile able to respond to ever changing consumer preferences.
As the maker and owner of the largest and most complete library of content in the world. We cover more surface area than almost any other media company theatrical streaming linear cable free to air gaming consumer products and experiences our own platforms.
Others platforms.
And we have no intention of being beholden to any one in particular or to a specific business model.
Simply put we are open for business.
There's been a lot of experimentation in our industry and we are all smarter for it.
At Warner Brothers Discovery, we believe strongly in the importance of preserving optionality and driving returns through a strategic mix of distribution and windowing options.
For example, we will fully embrace theatrical.
As we believe it creates interest and demand.
Provides a great marketing tailwind and generates word of mouth buzz as films transition to streaming and beyond.
When you're in theaters the value of the content and the overall viewing experience is elevated.
Then when the same content moves to <unk>.
And then streaming.
It is elevated again.
As films move from one window to the next their overall value is elevated elevated elevated we saw this clearly demonstrated with the Batman and all of us.
We have a different view on the wisdom of releasing direct to streaming films and we have taken some aggressive steps to course correct the previous strategy.
With respect to streaming.
Main priority right now is launching an integrated S Vod service.
And in a few moments JP will talk more about the strategy and some of the key building blocks and milestones as we bring HBO, Max and discovery plus together under one offering.
Our streaming strategy has evolved over the past year and really reflects the importance of.
Rather than the dependence on this segment of our global content monetization plans.
I am pleased with the work to date and the progress we continue to make on this front.
And in the spirit of optimization.
Once our S. Vod services firmly established in the market, we see real potential and are exploring the opportunity for a fast or free AD supported streaming offering that would give consumers who do not want to pay a subscription fee access to great library content, while at the same time, serving as an entry.
We point to a premium service.
We will talk to you more about our potential plans at our Investor day, which is planned for the end of the year.
Also pleased to announce today that we've extended our relationship with AT&T, making them a trusted partner and the distribution of HBO Max as part of their service offerings.
This is great news for our business as it ensures that even more people will have access to our world class and award winning content.
This leads to our third strategic priority.
And that is to operate as one company with one mission.
To be the Premier media and entertainment leader globally.
We believe the best way to maximize the value of our company is by operating our businesses as a combined enterprise rather than as a series of separate Siloed and unconnected business units.
HBO Warner Brothers Pictures Warner Brothers television CNN, our U S networks sports, we are stronger together and we'll make meaningful progress in operating our businesses as one team.
We also have a great ability to promote advertise and introduce new products and services enterprise wide.
And we intend to take full advantage of these capabilities you saw this with the successful rollout of Elvis across all of our platforms and Youre seeing it now ahead of the launch of house of the Dragon.
We're employing every capability at our disposal.
It is the biggest campaign in Hbo's history.
It is already paying dividends.
We watching of the original game of Thrones is up dramatically on HBO Max.
We're also going to be opportunistic about the way we grow our business in the future.
Whether by improving existing products or services to enhance and personalize the consumer experience.
Introducing new ones or expanding into new markets globally with particular focus on how to scale smartly.
With an eye on sustainable free cash flow.
Even during periods of incremental reinvestment.
We see ample opportunity to drive significant efficiencies from further integration and transformation, which Gunnar will take you through.
It's a foundational tenant of how we will operate and manage.
The byproduct of which will be significant free cash flow generation and growth.
So our three strategic priorities are to create.
Create the most compelling and diverse content offering in the world.
Maximize its reach engagement and value through a broad distribution and monetization strategy.
And operate as one company with one mission to be the Premier media and entertainment leader globally.
In an industry is dynamic as ours.
We are best positioned for success.
We have everything we need to thrive creatively and financially including.
The greatest and most popular franchises and IP.
The most diverse collection of global media brands and assets.
The ability to generate awareness and excitement for our products across our own various platforms.
Our strong leadership team and the most talented creative.
While we're still in the early innings I couldnt be more excited about where we're headed as a company.
As I said.
We're open for business and if you're in this business. This is the place to be.
We look forward to sharing lots more with you at our Investor day at the end of the year and with that I'll turn it over to J B and he'll walk you through the details of our <unk> strategy.
Thank you, David and Hello, everyone over the last almost 120 days I've had a chance to spend time with is incredibly talented team take a closer look at both products in their technology better understand our proficiencies as well as areas, where there's a need for further development and dig in on what consumers are saying about the <unk>.
<unk> services.
We have a lot of work to do but these first few months have only strengthened our belief in the significant opportunity ahead of us and I am excited to share with you. Some initial thoughts on our strategy and roadmap.
First.
A bit of context.
For decades, our industry has embraced changing technology and consumer demand by evolving the very successful windowing approached exploiting content.
However in recent years, our strategy has emerged that suggests the video business will be better off collapsing all windows into streaming.
Overpaying for an over investing in content and offering it all at the same time for a low price.
We don't believe in this strategy.
While we intend for streaming to be a critical part of our company and a key driver of our growth as consumers continue to shift their viewing habits from linear to nonlinear is only one part of our diversified approach.
The focus of our streaming strategy is consumer choice. We believe there are multiple global consumer segments and streaming just like there have been for decades in traditional television.
Some were willing to pay a premium for an AD free experience, others, who are more price conscious and we prefer to pay less with limited advertising and a sizeable third group, who will not pay a subscription fee and only want to enjoy AD supported entertainment.
Warner Brothers discoveries unmatched depth and breadth of content provides us the opportunity to offer something for everyone.
Providing consumers with a range of entertainment options will maximize our reach and financial returns.
Currently we're focused on launching our combined <unk> product with both an AD light in an AD free version in many markets.
But as you heard we've also begun to explore options of how best to reach consumers in the free AD supported streaming space.
We currently license our library to others, but we'll assess how best to play in this growing business as the model evolves from free to air linear to free to view streaming.
Now focusing on our AD free and AD light <unk> offering.
Great News is the combination of HBO, Max and discovery plus could not come at a better time as both are enjoying strong momentum.
HBO Max has emerged as the most acclaimed streaming service among consumers and discovery plus remains one of the top rated apps and the dominant leader in real life Entertainment.
There are also two very unique and complementary streaming services.
Stinker and their content appeal, ranging from premium scripted series like succession, and our much anticipated house of the Dragon to leading unscripted programming, such as 90 day fiance and fixer upper.
The two services are also different in terms of how subscribers engaged with the content.
Some of it being more appointment viewing driving subscriber acquisition.
Other content being more comfort viewing driving subscriber retention with people watching hours on end.
These are two critical and powerful components of a strong and sustainable subscription business.
Couple this with our World class collection of globally recognized brands franchises series and characters. It is truly an unprecedented combination.
In an already crowded market consumers know these brands and they trust them to deliver quality.
The quality of our content engine speaks for itself as evidenced by the 193 Emmy nominations this year more than any other media company.
From drama.
The comedy.
Documentaries.
The factual.
Lifestyle.
The reality.
Local series from around the World.
The sports in Europe , and Latin America.
And of course movies.
Ahead of the launch of our new combined service.
We're introducing a number of exciting interim initiatives.
First content sharing.
As we announced earlier today discovery, plus we'll add a CNN original hub on August 19th making.
Making it the home of the award winning CNN series and films, including the Anthony Bourdain collection and featuring series such as this is life with Lisa Ling and Stanley Tucci searching for Italy.
And starting later this fall HBO Max will begin hosting some of the Magnolia content from the incomparable, Joanna and chip Gaines, including their latest series Fixer Upper Castle, arriving in October .
Second as David mentioned, we are leveraging the marketing power of our combined portfolio.
The biggest TV audience, many nights in the U S.
Second largest broadcast group in Europe , the number one pay TV portfolio in Latam and leading pay TV lineup in APAC.
We will drive significant awareness for our content and streaming products much at no cost given the creative use of unsold or noncommercial inventory.
Shark week is just one recent example of the marketing benefits and financial synergies, we see from strategic cross promotion across our company.
Now <unk>.
More about the product and technology.
We will rollout our new combined offering under a single brand and we'll have more to share closer to launch on the product side, we recognize that both of our existing products have shortcomings HBO Max is a competitive feature set but it has had performance and customer issues.
<unk> plus has best in class performance and consumer ratings, but more limited features.
Our combined service will focus on delivering the best of both.
Market, leading features with World class performance.
To deliver this our team has developed a clear roadmap to migrate onto one tech stack leveraging much of the core infrastructure of the highly rated discovery plus service.
With significant and important feature enhancements from the more established HBO Max.
Our product design and feature set will enable better content discovery and more personalized choices.
All of this coupled with the unparalleled breadth of quality content will help drive our leading objective which is growing engagement.
This will in turn enable us to meaningfully reduce churn support gross ads and increased monetization, particularly with our AD light offering.
There is much work to be done over the coming months.
Some retooling the tech platform to enabling proper content and metadata in just around the world and ensuring a seamless customer migration for launch.
Lots to do.
And we are determined to get it right, which will take a bit of time.
Our primary focus for the rollout will be in the markets, where HBO Max is already launched.
It's broader international footprint.
We plan to launch the service sequentially starting in the U S next summer.
Latin America will follow later in the year European markets with HBO Max will following early 'twenty four.
With additional launches in key Asia Pacific territories, and some new European markets coming later in 2024.
Of course, as we get more of the development work and testing under our belt, we will explore ways to accelerate the rollout if and where it makes sense.
In addition, there will still be significant opportunity for expansion beyond this as these 70 plus countries represent less than 60% of broadband homes globally, excluding Russia and China.
And many of the biggest markets such as the UK, Germany, and Italy do not fall within this 2025 plan.
But we want to remain disciplined and prove out the strength of our product and profitability first.
All of this culminated in developing a strong financially attractive business over the next three years.
Our focus is on shaping a real business with significant global ambition, but not one that solely chase's subscribers at any cost or blindly seeks to win the content spending warrants.
Ted one that scales smartly.
So now what does this all mean for the streaming business.
Our financial North Star will be EBITDA, driven by solid topline growth and greater cost efficiency from the combination of these two products.
We expect peak EBITDA losses for the DTC segment will occur this year in 2022, as we do the heavy lifting around technology personnel and integration ahead of the planned relaunch starting next summer.
We're targeting the U S streaming business to be profitable in 2024 and for the global streaming segment to generate a $1 billion in EBITDA by 2025.
Embedded within this target result for 2025 is an EBITDA drag from less mature markets and new market launches.
We believe that we can achieve these milestones with a total subscriber base of around 130 million global subs.
Today, our total subscriber number for HBO, Max and discovery plus is $92 million, an increase of $1 7 million over first quarter.
This number now excludes other streaming products in the portfolio and synchronizes, our subscriber definitions, which gunnar will get into more later.
Goal of this is to provide you with a clear and transparent number of true paying subscribers to our core service.
You should also note that we estimate an additional overlap of around 4 million subscribers between the two services today.
So, we anticipate adding more than $40 million incremental subs by 2025.
Turning to <unk>.
As we just reported our current <unk> is almost $8 globally comprised of nearly $11 domestically and almost $4 internationally.
We expect healthy <unk> growth off this base due to a few factors.
First our new pricing strategy consistent with our profitability focus we will shift away from heavily discounted promotions that were part of the gross ads focused strategy of the past.
So a more balanced approach that optimizes revenue as well as subscribers.
Second and related to this price increases, particularly in certain international regions, where we are well below market.
We will also plan for periodic increases as accepted in the marketplace.
Third scale benefits from broader distribution of our AD light offering and as our reach and engagement grow we will also drive CPM leveraging technology enhanced products and targeted advertising.
Clearly started seeing the benefits of this at discovery plus.
On the cost side, we see meaningful synergies from two particular non content areas.
Marketing, which is over 60% of SG&A, we will see benefits by moving to a single brand and product leveraging the power of our own networks as well as more optimized spend.
And technology, which is the third largest portion of our Opex, where we will eliminate duplicative spend reduced third party vendors and see significant opportunities for automation.
Looking ahead, we will continue to have healthy content investment, but with these two content portfolios coming together, we see smart opportunities to do this at a much more measured pace than in the previous plans.
All in we see long term margin potential at scale of at least 20% and expect to make significant progress towards that goal over the next few years.
Lastly, based on the operating leverage in the business. We believe we can achieve incremental margins of around 50% of every dollar of additional revenue growth.
To summarize at Warner Brothers Discovery, we believe that in an already crowded market and at a time when the global economy is prompting many consumers to prioritize their purchase decisions.
We are uniquely and best positioned to be at the top of global consumers lists for video entertainment.
Our greatest strength and what positions us for success as a company long term is our ability to monetize our unparalleled collection of content in multiple ways in order to provide consumers choice and optimize asset value.
That is what we intend to do and streaming the one key part of our overall strategy.
I look forward to sharing more with you as we get closer to launch and now I'll turn it over to Gunnar for a closer look at our Q2 financials.
Thank you Jamie and good afternoon, everyone. As you heard from J B, we are taking a thoughtful approach in how we intend to scale, our DTC business smartly and methodically and is just one component of a more balanced distribution strategy versus one that seeks to drive subscriber growth at any cost.
This will be an important theme throughout the discussion of our second quarter financials, and our outlook for the balance of the year as well as 2023.
Turning to our financials as you can see it's been an extremely busy first full quarter as a combined company strategically operationally and financially.
Picking up from when we spoke to you last while we've already implemented a significant number of initiatives. Following the closing of the Warner Media transaction, we've only become more confident about the long term potential for Warner Brothers discovery, the strategic logic behind bringing these two great companies together is as apparent and sound as when we announced the deal.
As noted prior the recently concluded upfront is a timely example of just that despite the more challenging macro environment. We're very pleased with our performance, which proved the enormous value of our content portfolio to our advertising clients.
And as a differentiated means to service brands.
Out of the gate as a combined company, we have been focused on debt Paydown and I am pleased to report that by the end of this month, we will have paid down $6 billion of debt since closing the transaction were.
We're equally as focused on integration and efficiency and I am very pleased with the progress of our synergy program.
We now have 1000 individual initiatives staffed measures already implemented worth $1 billion of run rate savings are clear grip on milestones and business cases for at least another $2 billion in flight and eyes on further upside and opportunities.
We will continue to update the market on progress as well as implications for related cost to achieve as we move our synergy program through the implementation stages.
Now I'd like to very briefly address our Q2 results, which we are providing in our new segment structure.
Composition of our new segments is very similar to the way time Warner presented previously.
In addition to the second quarter financials, we also provided trending schedules, including 2021 segmented pro forma financials with the earnings release this afternoon.
To give you a financial baseline for Warner Brothers discovery. The trending schedules are also available on our Investor Relations website.
I will speak to the second quarter financials on a reported basis and we will address growth rates on a pro forma combined ex FX basis as always to provide more transparency on underlying performance.
Let's turn to the individual segments, starting with studios.
<unk> results were driven by strong games performance, specifically behind Lego Star Wars, the Skywalker saga as well as consumer products, while home entertainment and theatrical face difficult comparisons against last year's strong Covid lifted catalog sales and larger film slate.
With the networks revenue was up 1% and EBITDA was down 11%.
Advertising increased 2% globally, largely driven by sports on the Turner nets in the U S. While international advertising was down modestly in large part due to the sale of <unk> last September as well as a decline in EMEA.
Global distribution revenue was down slightly with the U S flattish and international down, 3%, which was impacted by pricing declines in western Europe .
EBITDA decreased in part due to increased sports rights costs versus last year.
Within DTC revenues increased by 4%, while adjusted EBITDA declined $325 million year over year.
Performance was mainly driven by number one substantial content investments across the global footprint as part of the push to launch HBO Max in as many markets as possible prior to closing the deal as well as number two revenue pressures in the wake of sunsetting, the Amazon distribution deal last September and number three tough prior year comps.
2021, enjoying the benefit of the day and date windowing strategy for Warner Brothers feature films.
Consistent with our prior comments, we continue to thoughtfully spend ahead of the launch of our integrated product and part having put some plant new country launches on the back burner, but we are gearing up and are very excited for the global release of household Dragon in August the highly anticipated prequel to game of Thrones.
Importantly, we're changing the way we present, our <unk> subscriber numbers going forward to align our subscriber definitions across the legacy discovery and Warner media businesses.
Starting with the paying subscriber count reported on our Q1 earnings call of roughly 100 million subscribers. We have made the following key adjustments that totaled 10 million subscribers.
First the <unk> HBO Max subscriber number historically included certain unactivated subscribers under the AT&T mobility distribution agreement.
With legacy Discovery policy, we will exclude such unactivated subscribers going forward.
Second as JV detailed we have refined our strategy with a clear focus on one combined DTC product as such going forward, we will exclude noncore R&D to see subscribers outside of the discovery plus or HBO Max product from our account such as subscribers of motor trend Eurosport player and a few smaller other products.
Yeah.
Against this harmonized definition, we ended Q2 with $92 1 million subscribers, representing $1 $7 million sequential net adds during the quarter.
Please refer to the aforementioned trending schedules for historical subscriber data as part of the harmonized definition.
Please note that while we have adjusted our <unk> calculations further corresponding revenues total Warner Brothers Discovery DTC segment revenue will still include fees received from and for those subscribers no longer included in our core subscriber count.
Now turning to the consolidated group on a consolidated basis revenue was down 1% driven by increased intercompany eliminations impacted by larger internal sales and licensing while adjusted EBITDA was down 31% or $812 million year over year. These results are driven by the legacy.
Warner media businesses with significant cost increases across all segments.
Please note year on year, FX was a $228 million headwind to revenues and a $30 million headwind to adjusted EBITDA during the quarter.
Despite the many cross currents running through our P&L at the moment, we ended the second quarter with $789 million of reported free cash flow. This included approximately $250 million of cash restructuring and onetime charges related to the merger and integration.
With respect to overall Q2 financial performance clearly these results are neither indicative of the health of the underlying assets nor off their longer term trajectory, but rather the fact that we're starting from a less favorable position compared to our expectations and.
In addition to the clearly more challenging macroeconomic backdrop and a changing industry dynamic in the streaming space. We have also now had an opportunity to fully assess legacy Warner media financials post closing.
Having concluded this process, we determined that certain legacy Warner media budget projections that were made available to us prior to closing varied from what we now view as legacy Warner Media budget baseline post closing.
On taking a deep dive and pressure testing what we found our assessment has resulted in lower EBITDA projections.
Specifically, we identified a number of approved investments in foregone revenue in various parts of the business that when taken together impacted full year 2022, EBITDA by roughly $2 billion.
Some examples of these business decisions include number one significant reductions in external content sales.
As part of a corporate initiative to prioritize HBO Max growth globally, new content licensing deals to third parties were largely halted and content was in general made exclusive to HBO. Max. This is of course, an upside opportunity over time as we ramp initiatives back to a balanced level of monetization depending on relative value contributions.
Number two similarly, certain actions taken to limit HBO Max <unk> distribution provided a headwind to performance and we believe there may be opportunities to course correct.
Number three substantial investments in kids and animation content for both linear and DTC platforms without an adequate investment case against them on before substantial investments in direct to HBO Max films for which again, we did not find sufficient support this means adjusting the way we invest going forward and also are evaluating those.
<unk> already completed or in progress wander twins, Batgirl and Scoop holiday homes are examples of streaming films that do not fit this new strategic approach.
These are difficult decisions, but we are committed to being disciplined about our framework that guides our content investment for maximum returns.
Number five significant incremental and loss, making content investments for the Turner networks, specifically content spend on shows that did not have a path to generate sufficient ratings or incremental monetization potential.
And number six incremental corporate expenses transfer from AT&T, resulting from the spinoff of Warner media as per the final carve out financials.
While these factors will of course impact our 2022 financial performance and 2023 to a lesser extent, we have implemented immediate measures to address and redirect the trend line.
Importantly, supported by key leadership changes and the introduction of a more robust framework for capital allocation based on financial metrics and measuring kpis.
These measures include number one the shutdown of CNN plus number two restructuring the scripted content portfolio on the linear nets hidden animation director HBO Max films as well as international local content not sufficiently supported by robust enough investment cases.
Number three a more balanced approach to external licensing as we embrace a more holistic content monetization model for Warner Brothers discovery globally generating significant revenue upside while protecting key strategic franchises such as friends Big Bang theory game of Thrones et cetera.
Number four implementing an HBO Max distribution strategy aimed at wide availability as opposed to D to C only distribution as well as number five greater accountability alignment and communication across businesses.
Turning now to synergies our work on integration and transformation since clothing gives us increased confidence in the synergy opportunity every day over the past 15 weeks I have experienced the muscle memory that many on our integration teams have built over the past years of change and integration.
We have already implemented initiatives totaling more than $1 billion of run rate impact. This will grow from this point the opportunity to implement transformational change across the global organization is enormous.
We're being thoughtful about it's prioritization and cadence.
Individual initiatives range from direct merger related opportunities such as consolidating our real estate footprint against hybrid and agile work environments to opportunities tied to David's operating philosophy as one integrated company then that opens up tremendous transformation potential along systems integration process harmonization and importantly optimize you'd.
<unk> of our own all promotion and advertising potential.
I am very pleased with how well the program has progressed, so far and based on the savings potential and our initiative funnel I have full confidence that we will expect at least $3 billion of synergies overall with $2 billion to $3 billion of synergy realization in 2023.
Naturally we will update the market regularly at certainty on value and timing increases.
With that I want to share our current thinking on the 2022 and 2023 financial outlook as you May recall, we first developed our guidance for the combined Warner Brothers Discovery 15 months ago. Today. After 100 days of thorough analysis and financial planning post close we are adjusting our 2022 and 2020.
Three EBITDA outlook, primarily based on first.
A less favorable macroeconomic backdrop, resulting in a more conservative outlook overall and for AD sales specifically.
Second a change in the streaming industry dynamics and our strategic response and third as noted earlier the differences in legacy Warner Media budget projections that were made available to us prior to closing versus what we now view as legacy Warner media budget baseline post closing.
Taking all these factors into account 2022 will clearly be a transition year and we see an adjusted EBITDA in a range of 9% to $9 5 billion.
For further context, I'd like to provide some color on third quarter trends.
Mobile advertising revenues in the third quarter will be impact impacted by some tough prior year comp specifically the summer Olympic games.
NBA Eastern Conference finals games played in early July last year as well as from the sale of <unk>.
And given the less favorable macro environment, we are seeing softer demand in the scatter market at the moment.
As such we expect Q3 global AD sales to decline by high single to low double digits based on current booking trends.
On the positive side, we are beginning to see the impact of our course correcting measures and we expect some synergy capture beginning in the back half of this year.
Furthermore, we expect to generate free cash flow of around $3 billion after cash cost to achieve in 2022 on that basis I am expecting net leverage at year end to be approximately four eight times.
Turning to our outlook for 2023 based on the full year impact of our 2022 corrective actions and $2 billion to $3 billion of synergy realization in 2023, we expect adjusted EBITDA to be at least $12 billion.
We expect to convert approximately a third to a half of our adjusted EBITDA into free cash flow in 2023, as we make progress towards our long term target of approximately 60%.
The cadence of content investments restructuring spend.
Capex and working capital improvements will impact the timing of free cash flow generation.
With that I want to give a quick snapshot on our balance sheet.
We are reiterating our long term gross leverage target of two five to three times, which we expect to hit by the end of 2024, and our gross leverage will be within our current ratings category by mid 2020 for earlier.
As stated before we will continue to dedicate virtually all free cash flow generated to debt reduction until then.
We have $53 billion of total debt at the end of Q2, including $6 5 billion of term loan.
Importantly, our debt financing is generally long term with an average maturity of more than 14 years and a four 3% average interest rate and.
Equally importantly interest rates for the vast majority of our debt are fixed.
We have no remaining payments due in 2022, and we currently have $1 $3 billion due in 2023 and $4 3 billion due in 2024.
Also note earlier this week, we finalized the post closing working capital adjustment process with AT&T as part of the merger agreement and as a result of that AT&T will pay us $1 $2 billion in August .
With that and combined with prepayments made in July by the end of August we will have paid down $6 billion since closing the transaction in April .
We've covered a lot of ground today, but we've really only scratched the surface with respect to the significant amount of strategic work being done across the organization.
And we will take you through a much deeper dive with a comprehensive look across content and networks as well as D. C. At our analyst day towards the end of the year.
And clothing, if there is one key message to takeaway is that we have never been more excited about the underlying strength of the creative bedrock of this combined company and the broad monetization opportunities for decades to come.
David's leadership team has come together quickly and we're fully focused on driving hard to deliver the value upside of this combination and I remain excited to share our progress with you along the way.
With that I'd like to turn it over to the operator, and David JV Eni will be happy to take your questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by the number too.
Please standby for your first question.
Your first question will come from Bryan Kraft Deutsche Bank. Please go ahead.
Hi, Good afternoon, just two if I could I guess first David there's a lot of reporting in the press about summer.
It's being delayed and of course, the canceling of that girl.
I think that film in particular was almost completed can you just talk about the decision to cancel baccarat.
Issue and what's happening more broadly.
Brothers film business changes, you might be making and particularly the direction youre, taking with the DC Universe and then just had one for JP on the SaaS product is the intent.
Went there to offer the SaaS service in western markets like the U S, where consumers are accustomed to paying for content or will it be more limited to markets, where you've got where you would have a low penetration of paid services and therefore with building penetration where he might not otherwise achieve it. Thank you.
Great. Thanks, Brian .
Tom.
So let me start with the fact that the.
The Warner Brothers Motion Picture group has fantastic IP and.
Great history, as you know without turning 100 and.
<unk> D C. The animation group.
Together with the entire Warner Library.
Our ambition is to bring Warner back and to produce great high quality films and as we look at the.
The opportunities that we have broadly D. C is one of the top of the list for us.
We look at at Man Superman Wonder woman Aquaman.
These are brands that are known everywhere in the world and the ability to drive those all over the world with Great story is a big opportunity for US we have done a reset we've restructured the business, where we're going to focus where there will be a team with a 10 year plan focusing just on DC. It is very similar to the struck.
Sure that Alan Horn, and Bob Iger put together very effectively with Kevin <unk> at Disney We think that we could build a long term much stronger sustainable growth business out of D. C and as part of that we're going to focus on quality, we're not going to release any film before it's rare.
We're not going to release the film to make a quarter without going to release a film.
The focus is going to be how do we make each of these films in general as good as possible, but DC is something that we think we can make better and we're focused on it now.
We have some great DC films coming up block Adam.
Shazam and flash and we're working on all of those were very excited about them.
We've seen them, we think they are terrific and we think we could make them, even better and thats, what Mike and Pam and the team are doing in.
And focusing on that.
Strategically we've looked hard at the at the director streaming business.
We've seen luckily by having access now to all the data how director streaming movies performed.
And our conclusion is that expensive direct to streaming movies in terms of how people are consuming them on the platform, how often people go there or buy it or bias service for it.
And how it gets nourished over time.
Is no comparison.
Two what happens when you launch a film in the motion picture in the theaters and so this idea of expensive films going direct to streaming we cannot find an economic case for it we can't find an economic value for it and so we're making a strategic shift.
As part of that.
<unk>.
We've been out in the town talking about our commitment to the theatrical exhibition in the theatrical window a number of movies will be launched with shorter windows. Some might have different kinds of marketing campaigns, where we take advantage of us having the biggest platform in a platform that all motion picture companies look for but we'll always be agile.
Our focus will be on theatrical and when we bring the theatrical films to HBO Max we find they have substantially more value and we have an ecosystem, where we can have the premier motion picture business. That's why most people move to Hollywood. That's why most people got in this business to beyond the big screen when the lights went out and that is the <unk>.
<unk>.
The economic model is much stronger and the other thing is that we're going to focus very hard on quality I said, we're not going to launch a movie until it's ready we're not going to go out you are moving to make a quarter and we're not we are not going to release a movie.
We're not going to put a movie out unless we believe in it.
And that's it I mean, and particularly with DC, where we think we want to pivot and we want to elevate and we want to focus.
And Brian on fast two quick comments number one is just a reminder, that as we look at that space. The content, we're talking about for that would be in that kind of a product.
It would be totally different than the content it will be in our premium <unk> offerings. So number one the distinction is totally different.
And with over 100000.
Titles across harvest episodes across our combined portfolio Theres a lot of content that wouldn't necessarily make sense in a premium product that might make sense in a fast. The second thing is on a market by market, but that's part of the assessment that we're going to.
We're looking at and we'll look through over the next few months and as we have more details of how we think and where we think the opportunity is the richest will come back to you and take you through it.
The objective is to grow the DC brand to grow the DC characters.
But also our job is to protect the DC brand and Thats what were going to do.
Great Operator head. So next question please.
Operator next question please.
Your next question comes from Jessica Reif Ehrlich of Banc of America Securities. Please go ahead.
Thank you hope you have any.
Questions on so if it's okay I'd actually like to go around to each one of the speakers.
David One thing I mean, do you have an amazing set of assets for one thing that's clearly being challenged are your linear networks and I think the big surprise in Q2 results. So far as how that video sub losses are in the U S. Can you just talk about your kind.
Your longer term view of your linear networks.
Just on the content side.
It sounds like sports news are going to be important part of of your content strategy.
Different is that from linear.
How are you thinking about getting new content for direct to consumer and then just on the guidance.
So if you take that.
'twenty two guidance of nine to $9 5 billion plus three.
$3 billion I guess of synergy we're at 11 $5 billion to $12 billion.
'twenty three as a base, but what about if DTC direct to consumer losses are peaking this year and coming down.
Can you give us color on the magnitude upfront it sounds like pricing was great film should be normalized.
Or do you see the underlying growth.
Well why don't I start with the linear business.
Because we're big believers in the linear business.
There is some secular decline there has been secular decline it's leveled off it's declined more in the end you look at March madness, the biggest numbers since 94, the NBA up dramatically.
That was at a time when people said nobody below below a certain age is watching will they they're turning this tuning in for sport.
They're tuning in for news.
And when you look at the overall portfolio that we have live sport.
Live news together with entertainment in the the best kind of branded nonfiction library, where people get up the levers of food or HG I'd and watch all day.
So we think it's very hard to predict but we expect it's going to be.
A very significant cash generator for us in a very good business for us for many many years to come we have a great team running it is what we do is what we know how to do we have a team that's been doing this for 30 years, if the linear business is there.
Race car, we got a team of race car drivers and when when when we hear a noise or it's in third year, we know how to fix it. It's a business we know well we haven't begun to implement the libraries that we have now where we could take content that's debt.
Good.
Document of old documentaries on crime from HBO and put them on or take programming that exists in the library and move them on each of the cable channels or vice versa. So adjust that hasnt begun yet we also.
Our first getting our hands around the idea that we are.
We are very often the largest player in America in terms of our reach and the ability to use that now to tell people.
When they are watching hockey you can come over now and watch discovery across each use our existing platforms to drive.
Viewership from channel to channel so.
Been around a long time broadcast was dead when I was hanging out with Jack in the nineties.
What people said, but in the end that reach and the ability to drive advertising product is what kept it alive. We are still seeing CPM increases we were in the low to mid teens. This time, we're big believers and we think thats going to help us.
Okay.
Having said that.
The great thing that we have is we're going to have both sides. We have this very compelling free cash flow driver around the world domestically and around the World and then we have the dual service.
HBO HBO, Max will discovery plus coming together.
Together with our our full on over the next few years initiative of having a full basket and traditional and from three to two to premium to add light in digital and a big advantage in that right now HBO Max has never been hotter quality is what matters quality is what Casey in that.
Team is delivering it is the best team in the business, we're doubling down on that HBO team. They are all committed under contract and we're going to spend dramatically more this year and next year than we spent last year and the year before.
Just to go on the sports and news for streaming I guess I'd categorize it as an.
On sports, it's really about experimentation that I'd say, we're going to continue to be disciplined we have essentially two experiments ongoing which is one where we bundle of sports in this case Champions League in Brazil, and Mexico into our core entertainment offering at the same price as a really as an acquisition driver and we are.
Very happy with the results there and then we got a second one in Europe , where we up sell sports through a to a buy through tier at a higher price point and obviously, we'll be doing more of that now as we get closer to closing on our BT sports deal in the UK, which is probably will be the biggest.
Experiment on that and so we love the two experiments, we have going and I think we want to see that play out a little bit more to understand better what is the right strategy there, but we're going to stay disciplined and smart as it relates to sports and news I'd say, it's really more about we see live news is still a critical healthy important part of the traditional.
Pay TV ecosystem.
So live news continue will continue to be exclusively in that service, but that long form factual programming.
From CNN.
Particular with their award winning original and CNN films that has a natural home and a huge demand that we can satiate now initially on discovery plus as we announced this morning, and then eventually sitting firmly within the future product as it comes together and lastly on news we obviously.
<unk> continued to see outside of our kind of core streaming products with CNN dot com and the CNN digital services, a lot more opportunities with over 100 million users across the world to continue to experiment with that product and move potentially on ways to find not just AD supported models, but other models, where we can.
Ties that significant user base that comes to the service.
Okay, and then Jessica on on the guidance. So just to recap we we adjusted our outlook predominantly for three reasons.
Macroeconomic outlook today is.
A little less supportive than it was 15 months ago or even in April when we last spoke.
Industry dynamics in the streaming space and then the.
The differences that we see between projections made available to us prior to closing versus what we know.
Legacy <unk>.
Budget baseline post close.
To answer your question, specifically that Youre walk from the $99 five for this year to the 12 for next year. The math is obviously right.
So you are right to $3 billion of sinter.
Recapture as I said I also do think that we're going to see some flow through from the <unk>.
Of course correction measures that we have implemented right after closing that should support.
First the first quarter second quarter of next year. So if you put that together the answer is yes.
Not really.
Assuming any meaningful growth in the underlying or underlying growth in the business as usual.
In those numbers.
And the main reason as I as I laid out.
And the outlook for Q3 as the macroeconomic environment. There are so many factors right now I just don't think it's prudent to guide.
Two a significant too.
Significant underlying.
Improvement here in the core business that said.
We are super excited about the progress, we're making on the synergy side.
David spoke a little bit about the.
The linear business I.
I do think that there are.
Further cost opportunities there so.
We'll keep monitoring the external factors, we will keep doing the work.
The areas that we control and update you as we go along.
Okay. Thank you.
Yeah.
Great operator, let's go to the next question.
Your next question comes from Doug Mitchelson of Credit Suisse. Please go ahead.
Thanks, so much for taking the question so.
Gunnar following through on that the 33% to 50% free cash flow conversion in 2023, what's holding that back from your usual, 50%, 60% that you talk about and does that get cured by 'twenty four or is that long term goal of 60% something thats going to feather in over a longer period of time.
Jimmy I was just curious on.
What's your confidence level and the ability to increase engagement.
It's a big driver I think of what you are trying to do and as an engagement increases and you're able to monetize advertising at a higher and higher level.
Is the thought that you keep the price point, and let that $1 flow through to the bottom line or do you lower your AD supported to your price point and trying to broaden out the service how are you thinking about pricing on the AD tier.
In the United States.
Let me start Doug with the with your cash flow question. So.
Bottom line the the drivers behind this.
A third to a half.
<unk> guidance are essentially the same.
That I laid out four.
The EBITDA outlook and then in addition to that we obviously right now have a number of.
Moving pieces and cross currents in our financials as we move through our restructuring.
Cost to achieve for our synergy program.
There will definitely be some capex requirements, and we will have to see how the cadence for our content investment pans out. So these are all factors. There that are that are going to impact these numbers, especially sort of from a year over year basis, but to your point.
I don't want to give guidance for 2024, yet but.
I am confident that we will see continued progress towards that longer term goal.
And Doug on the on the questions on the streaming on engagement I'll tell you I think theres three levers that we think are key and why we are confident in our ability to drive much better engagement number one is kind of a brand marketing point, which is obviously HBO and HBO Max has stood for something which was a very.
High quality premium.
Scripted and particular drama series, they've never executed a real brand campaign.
To define what the new services and as we think about rolling out our new service certainly we will be coming to market with a big noisy campaign expanding the proposition.
With a much much bigger content offering and so a.
We think the brand and the marketing component of this is significant second is obviously the content proposition will be drastically enhanced as we bring the two services together with a much more complete array of content across all of their genres that I talked through earlier and then third the product.
Enhancements can't be underestimated, we see this from the HBO Max product today we're.
Limitations on search and discovery really limit the amount of content that has surfaced and viewed by users.
And we are confident based on what we've seen from the discovery plus side.
And a much more much broader use of content in a much longer.
Use of our watch time that we can actually get the combined product to see a much higher engagement level. That's one two on the pricing.
Nothing to share with you at the moment.
We're working through a bunch of different scenarios, but this far out from when we will come to market, we really don't want to discuss the specific pricing yet, but we will certainly have more detail for you.
As we go into 2023.
Alright, thank you.
Thanks, Doug let's move onto the next question. Please.
Your next question comes from Ben Swinburne of Morgan Stanley . Please go ahead.
Thanks, Good afternoon.
Wanted to ask you about the longer term outlook for direct to consumer and I know, we're going to hear a lot more at your Investor day. So you might not have a lot of details but.
It sounds like Youre going to have a bit of a pause here in growing the business as you get everything over to one product and one tech stacks, when we think about that $40 million net ads.
And the path to $1 billion of EBITDA should we be thinking about that growth as being really kind of starting.
In earnest.
Back half of next year, and so it's kind of $24 25, when we will see what this business can do.
And then I was just wondering if David you guys clearly have a view that sort.
The streaming at all cost strategy is flawed I think theres a lot of sympathy for that in the market today.
Back to 2019, when HBO was mostly wholesale business did like $2 5 billion of EBITDA.
It wasn't that long ago.
Im just wondering when you think about the long term opportunity here can you get back to those kind of economics I know you just laid out a 25 target but.
Did you did you entertain the idea is really rolling back the strategy more substantially earliest thinking about reclaiming those historical economics for the business.
Thank you.
And then actually.
Let me actually I'll take.
Both questions because I think theyre very very related so we we laid out some building blocks for the longer term outlook for D. C and to answer your question. Specifically there are obviously two drivers one is the revenue growth and the operational gearing from that revenue growth.
I think Directionally you are right.
We're going to be a little more cautious regarding marketing et cetera, before relaunching and so a lot of that.
Incremental growth is going to kick in sort of after our JV has relaunched that product in the summer. The other point, though is cost savings and as we said before <unk> has a lot of.
Synergy opportunity, we see savings opportunities and synergy opportunities across the entire.
The entire.
Cost side of the P&L and that obviously is going to start kicking in earlier.
And I mean.
In the very short term, we're all Super excited about how's the Dragon HBO as you heard David and J D.
In the middle of the largest marketing campaign ever so hopefully that's going to be a big help our for the very near term in this quarter and then to your point about the long term perspective again, the $2 5 billion.
Yeah.
Don't want to give an additional number here, but you heard JV say, what we think is possible to be achieved $1 billion in 2025. Despite the fact that we're still seeing some startup losses in that number even in 2025 markets rolled out later.
<unk>.
We do continue to see even for the combined company a long term margin opportunity of north of 20% and that's on the basis of our combined model now with sort of a fully fledged.
Frameworks on the various.
Cost buckets so.
<unk>.
We're confident that this is going to be a great addition, and additional platform and as we said not a.
Not being religious about turning the entire company into a <unk>.
Support pipeline for D to C, but DTC as one additional platform. So I think I think this is a great outlook. We're excited about it we're committed and we'll implement these plans and keep you posted.
There was some buzz.
Today about HBO, Max and we're going to start doing less series.
Yeah.
Our strategy is to embrace and support and and drive the incredible success that HBO Max is having its really to it.
The culture and the taste of KC and the team and the fact that they not only read the scripts, but they fight with all their creative to make the content.
And storytelling.
As strong as possible.
It's it's at a very unique moment, we think it is an extraordinary asset it's a extraordinary advantage.
Adam.
We said this before it's not how much it's how good that aligns with us at discovery as well in the content that we've been doing and the characters in the way that we drive brand but.
The majority of the people on Casey's team.
<unk> have been locked up Casey is here for the next five years.
And we hope longer.
He is truly a unicorn is ability to relate to talent to make content better his leadership and you see it in and what's been coming out of HBO and how it's affecting the culture and the energy and what people are talking about but we want it to be broader casing and the team wants it to be broader and we're starting to.
We have some real success, we're now going to put in everything that's on discovery, plus and all of that original content as well as some of the premium content from CNN and it will be the home of all of that.
And as we.
We will as one company come behind that and we think that that product is going to be superb.
<unk>.
That is.
Curation, it's about quality.
About how good.
So the center spoke of that is the quality of HBO, Max and that team. We've already started creative meetings within the HBO Max team together with we now meet once a week all the creative that the company.
Thing that we've initiated.
With me on the lot in person.
In addition to the multiple overall staff meetings, but to create the creative meetings with everyone. Together has been really effective in a way to not only talk about storytelling, but talk about how do you share content and how do we help each other with great talent. So.
We're very encouraged and very supportive.
And then as you as you probably can imagine the number one things and our view for a successful streaming service as a business is to get churn down and to have a low churn number.
End of the day, having great.
Appointment small amount of appointment viewing.
Series the challenges people come in and then they go out if there is nothing else and ultimately the breadth of the offering matters to get the churn down so that there is something for everyone. In the household everyone in the family and we've seen it across all our data points, whereas the more people you have in a household using the service. The stickier. It is low your churn is the <unk>.
<unk> businesses and so at the end of the day, putting all the content together was really the only option we saw to making this a viable business and as David said.
I think it's important given some of the noise, but that HBO and the Max original has remained.
Unequivocal home with the best premium TV and it remains the centerpiece of our combined streaming platform given the quality, that's coming out of KC and that team.
Jamie.
I Should've mentioned as well that as part of our projections.
That's the part that's going to continue rolling we're spending as much as never before and we intend to keep keep growing that's been for HBO content to be clear.
I appreciate all the color thanks, guys.
Thanks, Ben operator, let's take the next question.
Your next question comes from Robert Fishman of <unk>.
Nathan Please go.
Go ahead.
Yes.
Hi, Good afternoon, I have one for David and one for JV or Qunar and <unk>.
David you discuss continuing to stock into third party can you just help us how youre thinking about HBO strategy to sell content to sky going forward.
We're launching DTC directly in those markets and then for JV, arguing there can you address how do you plan to allocate your future sports cars like the NBA renewal to DTC.
How important the AD light.
Our fast platforms play into your $1 billion, EBITDA target or achieving that 20% long term DTC margin. Thank you.
Great.
In legacy discovery, we own together with Mike Fries, and Malone, all three media we had.
30 production companies and we would look at or at at Warner Brothers television is the really the greatest the largest and most.
<unk> quality production operation and the incredible names and talent that they have and so the legacy of Warner is creating great content and selling it.
Less built a big business.
Bye bye carrying all of Warner brothers content.
We said it before when we were at NBC was must CTV Jack Welch.
When the content when the entertainment guys left the room, you said it was Warner brothers television.
Acre they are maker and the greatest maker of content. That's the heritage of this company.
We want to sell to third parties, it's a very profitable business for us we think it could be more profitable.
There is there's a lot of money being spent for the best content, we have some of the best of it.
And we want to continue to do that and we're going to do it. In addition, we have a huge library of content.
And strategically.
We are pivoting to the decision of anything thats important to us to growing HBO HBO, Max sitting down with Casey sitting down with JV going through the data what's critical to us we're going to keep that exclusively what what what what kind of content could we could be nonexclusive and have no impact.
Pact on us why should we want to monetize that to drive economic value and then this content that.
We're not even using right now so massive amounts of TV and motion picture content that we're not using so do we use that to just develop our own best of class.
<unk> platform do.
Do we sell a lot of that and that's what we're going to come back to you with and on Sky specifically, Robert We obviously have multiple years left in our existing and important and long standing relationship with them and so it's not we don't have to.
Deal with that question at this point.
The deal as we've talked about has another is outside of the 2025 time horizon that we gave you.
Projections on and.
So.
As we get closer to the end of that deal will certainly come back to you with with further thoughts as how are you.
We go to market in those on those three markets and then Robert just to clarify two things number one that.
Any fast activity is not part of the guidance that we laid out earlier again, we'll update you as we go along and then to.
To the point about allocating sports costs I, just want to make one thing cleared so the way. We're now segmenting. The business is following the structure, how David looks at the business that informs that the segment reporting structure, but importantly, we're also treating these individual segments.
Essentially as individual units and that means that all of the intercompany activity revenues and costs are essentially negotiated on an arm's length basis. So from that perspective, you should assume that any content sports or otherwise is going to be accounted for at essentially pay our third party terms you will.
See the.
This leads to a bigger chunk of eliminations in our consolidated P&L, but I think is the best way to really clearly unfairly show the.
The actual economics of the business is in.
Needless to say is also important from the perspective of our partners.
The studio space.
Very important that we that we account.
The fair market values and third party terms.
Great. Thanks, great. Thanks, Robert.
Thanks, Robert the operator next question please.
Your next question comes from Michael Morris of Guggenheim. Please go ahead.
Thank you guys good afternoon.
I'd like to ask one about about HBO and HBO HBO brand I know youre going to share more with US later in the year, but there has been some price indications that may be.
You don't feel like the HBO brand itself is broad enough or it doesn't have as much value maybe on a global basis as you would be looking for so I'm curious if you can share anything about how you feel about that brand and the future of sort of maximizing that.
And my second question maybe for Gunnar.
When you were discussing the items that have impacted your projections.
You mentioned, a couple of times change and streaming industry dynamics, I guess relative to when you initiated the merger I am hoping you can expand on that a bit so I understand that valuations have come in but maybe could you be more specific on the dynamics that you see now is impacting the industry or the profitability of the business that you didn't see a year ago. Thank you.
Thanks, Michael well first I think the HBO brand is one of the great Crown jewels of the company and represents such so much and how we all get introduced to.
To really what premium TV series, we're really all about.
We're going to look at.
We continue to look.
The data right now is more and more if you look at how people see HBO Max.
More and more people are saying that's the place. They go that's a place that they prefer it's the place that has the highest quality.
That that data looks different than it did a year ago it looks different than it did six months ago. So we're talking to consumers and we're evaluating and we'll let you know when we make a determination.
Also.
<unk>.
The HBO brand no matter, what as David said as being a crown jewel will live on Theres a difference between what the service may eventually be called or not.
Versus what HBO HBO will always be the beacon and the ultimate.
<unk> stands for the best of TV quality, so that that remains unchanged in any scenario and armani, whether it's whether it's in the topco name or not and we will keep you posted as we make a final decision.
And then Mike.
Mike on the on the industry dynamics.
I think it's clear that.
Over the past 12 months and even more so over the past six months maybe.
A lot of the.
<unk> points here have changed and most importantly, when it comes to industry wide subscriber growth.
<unk> growth.
And obviously a lot of the.
The cost structuring decisions specifically for content.
Are being made 18 to 24 months.
Advance the.
The most important point here.
For us the strategic response is.
<unk> laid out.
One that focuses on value.
On revenue rather than purely <unk>.
Subscriber numbers and I also think if you take a step back here from a longer term perspective.
The way I look at the changes in the industry I view that actually as additional support for <unk>.
Now we have all along been describing our strategy D to C. As one platform and a larger portfolio of assets.
Assets and then the larger lineup of.
Distribution outlets, we're not going to be religious about driving hard to fuel just one platform.
<unk> has its space.
And one of the other one of US discovery is uniquely positioned with the enormous surface area with with our customers to two.
Service to them and to tell great stories for decades to come.
Okay. Thank you, let's move onto the next question.
Our next question comes from John Hodulik of UBS. Please go ahead.
Great. Thanks, guys and thanks for all the information.
Afternoon.
First on the content spend we had you guys down for between 17 and $18 billion on a pro forma basis and cash content spend and David on the back of your commentary that you're going to spend dramatically more can you give us an idea of how that grows over if first of all but that's in the ballpark of how that grows over the next six years next few years as you as you reach those 25 targets and then on.
The.
The sub growth you laid out sort of.
<unk> 40 million subs to hit to hit those targets, how do you see that broken down in terms of U S versus rest of world I think.
Most of the growth you've been seeing recently has been rest of world and you've had some some speed bumps here in the U S with Amazon and AT&T, but do you expect to be able to reignite U S or domestic DTC growth as you guys roll out this new the new product.
Thanks, Michael.
We will we're going to spend significantly more on the HBO Max product and other areas will spend less because we were not finding it.
<unk> return in the aggregate, we're going to spend more money on content, where content company. That's our product. That's what we do we want the best creative here at Warner and HBO and the Warner Brothers.
Brothers television and across our traditional platforms, creating content and we've worked in the budget.
That content spend will go up.
In each year and the years to come.
Hey.
Yes, I mean I think.
Yeah.
We ultimately.
We're going to be measured in terms of our spend as David said, we were re prioritizing what we're going to invest in in terms of the.
The penetration.
Obviously the U S.
<unk> discovery plus products are more penetrated than we are in much of the international markets. So by math, we will see more growth coming from outside the U S from inside the U S. But nonetheless, we do see.
Still a meaningful opportunity to get greater penetration in the U S. Even if the total numbers inherently of that $40 million will likely SKU.
More to international just because of the size of the opportunity, but the number.
Number one on the corner of Jb's desk and mine.
The breakeven and the $1 billion, if we do that I don't really care. What the number is we're not in the business of trying to pick up every sub we want to make sure we get paid we get paid fairly.
We have very high quality content in many markets, we should be paid more because we're providing dramatically better content and more robust content and higher quality content. If the number is $1 22, and we're in we're making over $1 billion that is the number for us we're going to grow subs significantly, but we want to run we want to drive profitability and free.
Cash flow.
Yes.
And then on the.
The one other point that I would.
I want to make on the content spend is.
To the point that David made we're ramping up our content has been both both companies have been spending more on helping rent have been renting up the cash spend so.
That should be viewed as one of the drivers as well.
Slide you on cash conversion also into next year.
Amortization over time catches up with the higher spend as we grow our business.
Makes sense thanks, guys.
Okay. Thank you next question.
Your next question comes from Jason Bazinet of Citigroup. Please go ahead.
I just had a very basic question. If you guys pencils out the streaming business for DTC business and it was demonstrably better than linear you'd be jumping in with both feet and.
Swinburne said I think the market agrees with you because I don't really see that today.
And so they understand your sort of.
Path to pursue both.
<unk>. My question is this do you think theres something endemic to the DTC business that will always make it worse like churn or the amount of.
Content, you have to put into the app to make it relevant or do you think it's something that is potentially transitory.
The pricing is just too low today and if the industry dynamics change in pricing goes up it could be in fact, a business such as good as linear.
Thanks, Jason first I think having both is a gift this is a fully balanced company.
We have a linear and free to air.
We're a big maker of content for for profit, we have gaming, where we take our IP in the gaming for profit we of the motion picture business to gather that some of the greatest talent in the world and for profit and then we have our streaming so having the amount of free cash flow that we're driving to in order to fun.
And then support.
Thoughtfully, the screaming business, which is critical as we transition.
As a as a gift.
I do think the business is going to change there'll be.
Probably.
Over time there'll be repackaging its for people to.
We'll probably end up being a couple of the best services, which we expect then we will drive to be.
And there'll be repackaging, either by the programmers or buy by intermediaries like an apple or a roku or an Amazon and.
And the experience to consumers will become easier and as it becomes easier.
Some of the some of the economic terms and churn.
Change I believe it's over.
Underpriced.
What ended up happening is it was a reaction to the capital markets. Let's just go ahead and collapsed businesses overspend on content people have shown that they were very happy to buy HBO Showtime Opex. There is a big group of people in America that low premium television.
The group that love, our robust bouquet of opportunity and they're willing to spend a lot of money domestically and outside the U S. Not as much but they are willing to pay it was a decision. We'll just say why have them pay a lot, let's just collapsed everything in spend spend spend and then charged very little and I think that was supported by this idea like clicks in the night.
<unk>.
Subs were going to be great currency, and so we're going to be very sensible about free cash flow. We've got the best Library, we think in the highest quality content. We think we could build a great business streaming business.
To touch everyone, but we're not collapsing businesses on it and I think sensibility will be that there'll be a lot of people that are willing to pay a lot more for the quality that we have.
Yes, maybe just to just to add to that just quantitatively look I wouldn't judge.
Our business by how it compares to a 40% 50% linear business I think that's well understood that that's a high bar.
We spoke you reiterated earlier that we see 20% plus margin potential for the DTC business.
We are.
Assuming.
Moderate some price price and <unk> increases as JV laid out.
And look at the end of the day. The last thing I would also say is its not either or.
The strength of our business and our opportunity here is the fact that we can.
Manage these various distribution outlets at the same time and I think these ecosystems will coexist for a very very long time, and that's where we really get the superior returns for all of our content investments that we're that we're able to monetize.
The content and get a return on every dollar spend across so many platforms, we effectively have four or five or six cash registers. If there's a cash register where consumers would come in.
And either watch or pay for a piece of content. We have every platform in the ecosystem.
In a world where things are changing and there's a lot of uncertainty and there's a lot of disruption.
That's to me, that's a lot more stable and a lot better than than having one cash register.
Okay, great. Thank you, thanks, Jason and depreciate, it and operator, if we could take the last question. We appreciate it.
Your next question comes from Doug <unk> of Cowen <unk> Co. Please go ahead.
Hey, Thanks for getting me on.
With the rollout of the combined product next summer. Obviously, you have two separate products now that have pretty pretty different content offerings and pretty different price points.
How conceptually do you do you plan to manage that transition are you going to allow people who are subscribed to the legacy services to remain on those services.
Are there going to be forced conversions can you talk a little bit how you envision that playing out thank you.
Yes, Doug we will have a.
A migration plan that will allow obviously has some element of particularly.
As you can imagine.
Our price discovery plus subscribers.
For some period of time to grandfather into the new product.
And migrate them.
Or migrate as many of them as possible up to the new product.
And so that is all part of the transition plan.
Obviously get people optimize the number of subscribers that we retained but at the same time at some point make sure that the people who are on the service or stepping up at some point in time to be in.
Inevitable higher price point than the current discovery plus prices that are at today. So there will be a transition plan that maximizes essentially retention of subscribers, but ultimately also gets to the right our proven and price points over a relatively.
Short period of time.
Thank you.
Great. Thanks, so much Doug and thank you everybody for joining us and that will conclude our call.
Ladies and gentlemen, this does conclude your conference call for this afternoon, we would like to thank everyone for your participation and ask that you. Please disconnect your lines.
Yeah.
Goodbye.
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