Q3 2022 Warner Bros Discovery Inc Earnings Call
Last quarter, we laid out three strategic priorities that serve as our guiding principles and influence our decision, making strategically operationally and financially star.
Starting with content.
Content is the heart of everything we do and we are investing at historic levels and the highest quality storytelling sports and news all the hard work. We are doing now will allow us to continue making meaningful investments and content to support our plans going forward.
Our best in class portfolio is led by the strongest content and creative executives in the business.
And what are the things that differentiates. These leaders is that they do more than just pick shows and write checks.
They support and nurture our creative and talent and.
And help them to bring their bold visions to life on screens large and small.
They are doors, who have spent time in the control room developing films and television shows writing scripts working closely with talent and creative.
They know their crafts inside and out.
What it takes to create compelling unforgettable experiences for fans worldwide.
And they know how to replicate that success and storytelling over and over.
No one embodies this creative commitment more than a new heads of D. C Studios.
James Gunn and Peter Safford, who.
Who have said that running DT studios is a passion project.
Not just a job.
James is a brilliant storyteller, who has the distinction of being the first and only filmmaker to direct a movie for both Marvel and D C.
Peter is a prolific producer whose credits include dc's highest grossing movie Aquaman as well as the entire conjuring universe and most successful horror franchise of all time.
We could not be more thrilled to have them join our leadership team and.
And I'm excited for what is to come.
I spent a lot of time over the last few months with James and Peter.
Talking about our strategy in long term plans for the future of D C across television animation and film.
They have a powerful vision and blueprint.
That will drive a more unified creative approach.
We will enable us to realize the full value of one.
One of the world's most iconic franchises.
They are hard at work right now.
Our teams companywide are working hard every day to ensure that Warner brothers discovery is the place creative choose to come and tell US stories, we have a huge advantage.
Warner Brothers with this 100 year legacy and ability to launch films in every corner of the globe.
Tied together with Warner Brothers television.
Biggest maker of television in the World and H B O.
Two of the most prolific story selling studios in the world.
Together it creates an unparalleled full service entertainment ecosystem.
To that end, we recently signed the long term deal with Matt Reeves, who co wrote and directed the Batman.
And created the upcoming new series the Penguins for HBO Max.
Todd Phillips will begin filming the highly anticipated Joker sequel next month.
We signed an overall deal with quit the brunson, a trailblazer, who brought us the hugely popular Emmy winning television series avid elementary.
And our longtime partner the prolific Chuck Lorre is producing his first series for HBO Max the upcoming comedy how to be a boogie with Sebastian Matt a scout, though just to name a few.
We're very excited about our robust film slate for next year, we're back in business with the lineup of features that is truly supportive of a distinct theatrical window.
The slate includes the flash Suzanne.
June two Aquaman Wanka, a prequel to the classic film the color Purple produced by Steven Spielberg, Oprah Winfrey, and Quincy Jones, and Blue beetle deceased first superhero movie starring a Latino character directed by and how Manuel Soto.
As well as exciting new series for HBO, and HBO, Max including the Idol from the brilliant Sam Levenson, who created euphoria.
Starring the weekend.
The last of US based on the post apocalyptic video game, along with new script that original series for Tvs, such as Lazarus project set to air on TNT next year.
We also have projects underway with incredible on screen talent, including Joaquin Phoenix, and Lady Gaga for Joker to Ryan Gosling has joined Margo Robbie for Ocean's 11 prequel.
Robert Patterson will return as Batman.
Robin C DS Emmy winning HBO comedy series, a black Lady sketch show has begun production on its fourth season.
The award winning cast of succession will return next spring for its fourth season also and the list goes on and on.
Are unparalleled.
He also allows us to grow our consumer products business and extend our characters into games one of the fastest growing media segments with titles such as the much anticipated Hogwarts legacy game built around the amazing World of Harry Potter and launching in the first quarter next year and.
And leveraging incredible IP, such as mortal combat.
Which is celebrating its 30th anniversary this year and still going strong.
On the sports side, we just resigned Ernie Johnson, Charles Barclay and Kenny Smith, the multiyear deals. We've also got a long term deal in place with Shaq with thrilled to have the four of them continue to host Tnt's flagship studio show inside the NBA.
I believe the best show in all of sports.
And this further reflects our deep commitment to sports and providing fans with the programming they can't live without.
C N N New show C. N N. This morning with hosts Don Lemon Poppy Harlow and Caitlin Collins kicked off this week with great bus.
No one knows morning television like Chris Licked.
And the show was one of the many building blocks he and his team are putting in place is Chris lead CNN into the future with.
With great courage and strategic vision.
Our second strategic priority is maximizing the overall value of our content through and Omnichannel distribution and modernization strategy. The fact is we cover more surface area in any other media company.
And that Optionality allows us to distribute our content in multiple ways.
No matter, where consumers go or what their preferences are premium paytv free to air theatrical streaming gaming we are there around the globe enable monetize our content and IP in ways that maximize audience and profitability.
Optionality has never been more important and we continue to refine what the right windowing and distribution model is so that we can reach even more consumers and maximize profitability as.
As we said last quarter, we will be aggressively attacking the Avon market with our own fast offering in 2023.
Is the company with the largest film and television library in the industry, we have a unique opportunity to increase our addressable market and drive real value and we plan to move quickly stay tuned.
Finally, our third strategic priority is operating as one company.
One plus one does equal more than two when it comes to working collaboratively and supporting individual efforts across our many businesses.
In many respects. This is a significant departure from the previous norm. We've already had some real success with our cross promotional initiatives such as what's sharply Elvis how so the dragon and Black Adam.
Fact is with our huge viewership share in the U S. A broad portfolio of networks and global platforms around the world.
We have an amazing ability to efficiently cross promote across our lineup.
Or one team philosophy is a core tenant to the critical work, we continue to do to transform the organization for the future.
Nowhere is this more evident than with our ongoing commitment to driving cinergy enterprise wide.
Success requires all hands on deck.
And we're seeing it.
In fact, I'm pleased to share that we have increased our synergy target to at least three $5 billion from $3 billion.
Goerner will take you through the details, but the key point is this is more than just a dollar tally of what we've saved on an expense line.
It is more than just a number we are fundamentally rethinking and re imagining how this organization is structured.
And we are empowering our business unit leadership to transform their organizations with an owner's mindset.
And a view on quality and accountability.
And you see this reflected in our numbers.
And some of the strategic decisions we are making.
We're making real progress and we're driving towards the end game.
Like everyone in our industry.
We are managing through some cyclical headwinds and secular challenges, including lower than expected and sales and faster paytv subscriber declines.
Sooner will say more but.
But I do want to make a couple of quick points.
First regarding our advertising sales, which you have been impacted by a number of factors that include the macro economic downturn and the strength of the NFL in college football on other networks.
Good news is on Turner, We just had major League Baseball's American League Division in Championship series on P. B S.
Both saw substantial double digit growth in viewership compared to last year.
So a shortened championship series wasn't ideal.
<unk> is off to a great start on TNT deliver.
Delivering its most watch regular season coverage since 2017 with viewership up 29% season to date.
And with March Madness in the spring along with our first ever coverage of the Stanley Cup finals.
From now through the summer we have a large share professional sports both here in the U S and internationally.
On the advertising side, we had a great upfront, where we outperformed the market.
And we spent the last four months reorganizing the AD sales team, we had a broad restructuring, including having sports and news reorganized and sold with entertainment and nonfiction is one full service offerings.
It was an awful lot of work and will glad to have it behind us.
The team is led by the superb John style of who has a great track record of outperforming the market and.
And did so for us in the five years following the scripts acquisition as he led our team at discovery.
So the team is now in place attacked.
Tacking the market with the full suite of tools.
Every way brand wants to engage with consumers whether through traditional commercials product placement dynamic targeting.
We will offer those touch points.
With respect to direct to consumer.
We added nearly $3 million net global direct to consumer subs this quarter.
And we expect a healthy inflection with the launch of our combined service and expanded global footprint.
With that we are excited to announce that we have moved up R. U S launch date from summer of 2023 to spring.
We have been very hard at work.
We can't wait to make the service available to consumers around the globe and get the business running on all cylinders.
While our team is hard at work preparing for the launch of our combined offering. We're also actively experimenting and testing hypotheses about the future product.
In large part to address some of the deficiencies of the existing platform.
And we're seeing some positive singles.
A few quick examples.
One is related to the product user experience.
Previously when a series concluded on H B O. Max There was no end card that would then recommend additional programs for the user to enjoy.
An obvious way to drive greater consumer engagement. We've started rolling this out and are already seeing very promising engagement uplift.
A second example around content.
We've begun experimenting with bringing D plus content onto HBO Max Star.
Starting with select Magnolia network shows such as Fixer Upper the castle, which was a top five show after only it's first few days on the service. These early green shoots bolster our strategic thesis.
That the two content offerings work well together.
And when combined should drive greater engagement, lower chern and higher customer lifetime value.
And lastly on churn, we've implemented a number of initiatives to improve customer retention and.
And these have helped drive our voluntary churn rates to record lows and the last few weeks.
We've still got a long way to go but these early signs are certainly encouraging.
As we said we plan to roll out the new service here in the U S followed by Latin America in 2023, and in Europe , and APAC thereafter, we see significant opportunity across the globe and we're excited to resume expanding our distribution in countries, where we are currently not represented as.
You would expect we made the strategic decision to hold off on active expansion until our new offering is set to launch.
Before I turn it over to Gruner I.
I was recently asked if I thought the Golden age of content was over and I said, absolutely not theirs.
There's nothing more important than content people are consuming more content than they ever have.
But it has to be great content.
It's no longer about how much.
It's about how good.
And ultimately it is the consumer who tells US what is good.
And the consumer is telling us right now.
With house of the Dragon Euphoria.
Men Harry Potter.
Friends Big Bang theory.
You take a look at the portfolio of 10, Paul assets across Warner Brothers Discovery.
And the breath is large and the opportunity Israel.
No one has a better or more recognizable hand of content IP brands franchises and personalities.
When we do.
That said I believe the Grand experiment.
Chasing subs at any cost is over.
Let's face it the.
The strategy to collapse, all windows, starve linear and theatrical and spend money with abandon while making a fraction in return.
All in the service of growing some numbers is ultimately proven in our view to be deeply flawed.
We believe there was a real opportunity to do things differently.
To deliver the content consumers want and we will pay for while getting the full value of are offering.
As we said last quarter, our focuses on delivering 1 billion of EBITDA and screaming by 2025 and.
And we expect to make significant progress toward this goal next year.
Profitability not purely sub count as our benchmark for success.
While we've got lots more work to do and some difficult decisions still ahead.
We have a total conviction in the opportunity before us at.
Warner Brothers Discovery, we've got the best assets in the industry reached.
Reached that extends from premium basic pay television and free to air to theatrical streaming consumer products and gaming exceptionally talented people across this great company and.
And the right strategy and financial framework to set us up for long term success.
With that I'll turn it over to garner and they will walk you through the financials for the quarter.
Thank you David and thank you everyone for joining us this afternoon.
I'd like to start out by building upon what David said earlier, we are very pleased with our overall synergy program and the broad canvas on which we're transforming this company.
To that extent I am now confident to commit to a three and a half billion dollars synergy number as we have had an opportunity to further assist our operations in more detail and refine our work frame plans.
That means we are now adding $500 million of incremental potential beyond the targeted $3 billion.
And we are still working on detailing out the financial impact of a list of further initiatives beyond what has already been quantified as always I will keep you updated as these plans reached a level of detail uncertainty we require for them to be included in our total synergy estimate.
Regarding the actual execution of our transformation program, we expect to have realised approximately $750 million synergies by the end of this year and an incremental year over year $2 billion in 2023.
From a high level and as David said the opportunity in hand goes well beyond just the cinergy capture dollar value. This is a fundamental transformation across them throughout the organization refocusing on how W. B D. As organized how it's managed how the teams are incentivised and evaluated all of which results in the Abyss.
80 to pivot and evolved in this dynamic media ecosystem.
And we are starting to see the financial impact materialized, the 11% of SG&A reduction X FX in Q3 is an important early proof point and we are on track for around 20% SG&A reduction in Q4.
We've seen great traction on a number of fronts early on.
First and global marketing efforts, such as with television and theatrical releases How's of the Dragon Elvis and Black Adam Most recently leveraging the broad footprint of are owned and operated media assets like never before helping to drive global awareness and a very cost efficient and effective way.
Second and content workflows, where across W. B D. There are numerous teams facilitating the important processes of content customization Languaging administration of rights participations and residuals et cetera.
Following substantive analysis, we have made the decision to centralize many of these critical functions and to harmonize the processes across the organization in some cases will collapse 10 to 12 versions of essentially the same process across the company into one best practice unlocking hundreds of millions of dollars and efficiency gains.
Third on the streaming side the previous strategy was to build largely duplicative organizations between HBO Max and the traditional international business. We have now embraced the powerful combination of global capabilities from our streaming team in areas like product engineering data and analytics and marketing.
Married with local expertise from our international team in areas like distribution content creation and add sales.
This has already led to clear a strategic direction streamline processes and decision, making while at the same time producing significant duplicative costs.
Fourth procurement is another Great example of how professional management will impact our financial performance.
For the first time, there is a full mandate across all of WPB to leverage the outstanding capabilities experience and expertise of our global procurement team and we are on track to deliver hundreds of millions of P&L impact.
And finally, we've begun the process of streamlining virtually every corporate and supporting function with a lot more to work through into next year and beyond.
Our focus is on the hard work and the tough decisions in the spirit of repositioning this company operationally and strategically so that in a more constructive market environment, where it better positioned to capture upside revenue opportunities, which after having restructured our cost base should result in an amplified impact to our bottom line and then an ultimate earnings.
The company significantly above current levels with real upside for long term shareholder value.
Turning quickly to the results for the quarter.
And we're still in the first year following the closing of our acquisition I will discuss all P&L elements on a pro forma combined X FX basis.
Starting with the studio segment.
Studios revenues decreased by 5% due to lower at home Entertainment revenues as last year benefited from Covid, driven demand and fewer new releases year to date resulted in less theatrical revenues and less titles hitting the home entertainment and pay one window during the quarter.
This was partially offset by a 34% increase in other revenue. Thanks for the reopening of our studio tours.
The revenue decline was more than offset by lower content expense for theatrical and television as well as lower marketing expenses from fewer theatrical releases bleeding.
Leading to studios adjusted EBITDA growth of 43%.
Networks revenues decreased 8%.
Specifically advertising revenues decreased 11% globally, primarily given the softening demand amid well noted global macro headwinds.
We have been quite transparent about the risks and the environment since the summer. Obviously this is something impacting all players across not only the advertising industry, but the broader economy, which is more or less continuous thus far into the fourth quarter.
Worth noting are a few items impacting compare ability with Q3 last year, namely the Olympics and the NBA playoff schedule, creating a few hundred basis points of additional headwind in the third quarter.
Given the strong value proposition of our platforms and reach Tailwinds and digital advertising solutions from products, such as dynamic AD insertion and continued pricing opportunities, we feel very well positioned and stand ready for when the market environment improves.
Distribution revenues declined 2%, primarily due to pay television subscribers declines in the U S and lower affiliate rates in certain European markets, partially offset by higher affiliate rates in the U S and premium sports packages in that town.
London revenues declined 37% of <unk> the prior year come from Sublicense The Olympics broadcast rights of 2021.
Networks, adjusted EBITDA decreased 2% lower content expense, primarily due to the Olympics last year as well as lower personnel and marketing costs, partially offset the revenue declines DDC revenues decreased 6% predominantly due to the exploration of the Amazon wholesale deal, which we have now fully lapped partially offset by retail game.
Advertising revenues more than doubled during the quarter driven by a subscriber growth on our DDC at supportive tears.
Cost of revenues increased 22% due to growing programming costs, while SG&A decreased 18% as we continued to take a more measured approach to marketing as well as better coordinating the utilization of the invaluable promotional firepower on all platforms.
Adjusted EBITDA losses worth $634 million during the quarter and we continue to expect that 2022 will be the peak year for adjusted EBITDA losses in the segment with healthy improvement next year on the back of cost synergy initiatives and positive inflection in revenue trends following the launch of the newly combined product.
Turning to consolidated results of free Castle, both revenues and adjusted EBITDA decreased 8% during the call.
And while still down our year over year EBITDA trends saw significant sequential improvement over Q2, and expect further sequential improvements in Q4 and into 2023.
Reported free cash flow was negative $192 million and let me provide some more detail here cash flow from operations decreased nearly $700 million, primarily due to seasonality from the semi annual cash interest payment on a large portion of the acquisition debt as well as merger and integration related costs, which totaled nearly $400 million.
During the quarter, including payout of retention bonuses to legacy Warnermedia employees put in place prior to the closing of the transaction.
This brings a year to date total to approximately $650 million.
Furthermore, we reduce the balance outstanding on the securitization facility by a $500 million from $5 $7 billion to five 2 billion, which also negatively impact Q3 free cash flow managing the program in line with a seasonal cadence of collections in revenue.
As previously mentioned, we repaid $2.5 billion of debt during Q3, bringing the total debt repaid since the closing of the transaction to $6 billion. We ended the quarter with $54 billion across that and $2.5 billion of cash on hand.
Turning to guidance now with two months left in the year, we see adjusted EBITDA for 2022 landing towards the middle of our guidance range of 9% to $95 billion or about $9.2 billion.
This is notwithstanding the incremental drag from currency and continued in greater than originally anticipated headwinds and the advertising market across much of the globe at.
It also includes the additional amortization of HBO content, we have implemented following the detailed assessment of our content assets.
We continue to see reported free cash flow for the year $3 billion and now see net leverage at the end of the year at approximately five times.
Building off of those projected baseline and looking to 2023, we continue to target and our teams are working towards $12 billion, an adjusted EBITDA and in a more normal advertising environment, we believe that targets should be achievable.
The lack of visibility on advertising globally creates a more challenging path towards achieving our target given advertising is by far the greatest variable impacting our financial performance for 2023.
I'd also like to offer a couple of other puts and takes to bridge from this year to 2023 first synergy will be a healthy tailwind and we expect $2 billion of incremental EBITDA impact year over year as I detailed earlier.
Second the first half of 2023, you should see an additional tailwind up a couple of hundred million dollars from the impact of our course correction measures implemented over the last several months for example, CNN plus.
And third FX trends in overall paytv trends are naturally outside of our control and difficult to project.
We continue to expect our free cash flow conversion rate to be in the 33% to 50% range. In addition to the factors described above free cash flow will depend on the timing and size of the cast restructuring costs will be realized from 2023 as well as on content and working capital dynamics.
To close I would like to reiterate that the future in mid to long term earnings power of this new combined company is as vibrant as ever and were decisively taken the necessary steps to enhance our operating structure and emerge as a leaner and stronger global media company.
Which will position us to take advantage of the eventual market recovery.
We continue to focus on and invest in high quality content and platforms with a flexible approach to modernization to drive growing and sustainable free cash flows, which we believe will ultimately maximize long term shareholder value.
And with that I'd like to turn it back to the operator, and David J B and I will take your questions.
Thank you ladies and gentlemen, you will now begin the question and answer session.
You have a question please press the.
Followed by the one on your Touchtone phone.
If you would like to try your request. Please press the star followed by the team.
If you're using a speaker phone please with the handset before pressing any key.
First question comes from Keenan.
Venkatesh War with Barkley Your line is open.
Thank you maybe.
Maybe we need to start off with the synergy guidance for next year and we looked at the 12, beginning EBITDA number and the and.
The free cancel the number obviously as you mentioned the subject of your macro variables as well as things like God cutting so.
I don't need that little visibility items, but could you help us with some kind of sensibility in terms of.
Oh, you're EBITDA free cancel it could get impacted.
If the macro environment was to get worse.
What better one bed together.
And then Ah David from your own perspective, and you think that'd be organization right now.
It looks like structurally it's mostly in please.
In terms of Orange stretch it as well as the people in different seats instead.
So as you go into the next year and beyond.
Strategically.
As you will note HBO in a bigger way.
In the new form in the U S as well as around the world.
How big of a focus is pricing.
Compared to <unk> right now and how would you expect that blue envelope.
Forward.
Hey, Hi phenomenon, let me start with with your first question.
The ticket the broader perspective.
Dark by the environment that we're seeing today because.
I think that's that's.
An important based on and as you know we have been <unk>.
Pointing to risks from the macro environment.
Macroeconomic environment around us for quite some time, so we're not surprised but the reality is as you can see in our numbers we came at than mine.
Minus 11 for AD sales, which is the with the lower end of our guidance we.
We see those trends continue into the fourth quarter now keep in mind for US specifically as we have pointed out last quarter there were some prior.
Prior year pump impacts.
Importantly from the Olympics.
And also obviously, we're talking about the the network segments separately now and so there were some positive growth drivers in the DDC segment, if you take that altogether.
Or a number would've.
More like mid to high single digits down, but the reality is as I said.
Those trends continue into into the fourth quarter and.
Don't want to give any more specific guidance for next yeah. That's why I laid out what we have control over and I'll go through that again.
Let's assume the midpoint of our guidance range for 2022 call at $9.2 billion. There will be a couple of hundred million dollars impact on the positive side in the first half of next year at the full effect.
Guess realize of the decisions that we have made in the second half of this year and then we have full visibility in full conviction off $2 billion of incremental synergy impact. So that takes a vehicle at 11 and a half billion dollars range for next year.
And then as we appoint the key question is the environment that we operate in and I don't want to make any any predictions here you guys can all form your own views, but we do we do have $10 billion in advertising revenue. So that is a a very material driver now that said.
We are very very bullish when it comes to the BDC segment for next year.
Obviously, not only a great synergy opportunity, but also.
As you heard from from David.
The.
The demand stayed for our combined product.
It looks a little earlier now than we had anticipated when we spoke three months ago I do think that there is a really.
Real inflection point.
Is available to us when it comes to do to see revenue on the back with us.
Re launched.
Have a much more robust still laid on the studio side et cetera. So there is a number of.
While driver impacting our performance for next year here.
And as I said with a with a somewhat more normalized add environment.
Is $12 billion is what we're working towards what the team is budgeting for.
But it's certainly.
Not in position to put that in the bank here today I don't know if that's if that's helpful.
On the pricing J.
<unk>, we've been doing a lot of work.
Peers around the world's we've been experimenting outside the U S. Maybe we're not going to talk specifically about our pricing, but you could talk specifically about how we're approaching yeah. I'd say, it's pricing is one of four things that makes us, particularly optimistic about the product from together.
Obviously, a content aggregation and pulling all the content pieces together.
The second thing the broader positioning that allows us to moving from a product that may have been slightly more tailored approach to a fewer number of people in our household products that actually appeals to everybody in our household.
The product improvements David mentioned wanted his his remarks earlier, but there's a whole myriad of other product improvements that we need to execute on the platform that will greatly enhanced engagement and attention and then the pricing. We think is one of the meaningful ones two data points on that that I think are important number one is by.
2023, HBO Max will not have raised price since its launch total then three years since pricing is move which we think is an opportunity, particularly in this environment.
And number two when we look internationally, our wholesale and retail <unk> are meaningfully lower.
Then the market leaders and for us that spells opportunity and ability as we think about the.
The new product coming to market and even some initiatives before the new product comes to market.
For for growth on <unk> internationally.
Thank you both.
Okay.
Our next question comes from Doug Mitchell payment with pregnancy. Your line is open.
Oh, thanks, so much.
I guess a clarification on the advertising how much of this is market and is any of this ratings trends at at villainy are not working anything specific about Margaret color that are either Dave or are good are you would give us in terms of.
What's driving the softness and as we tried all they'll figure out whether it's going to abstain or get worse or get better.
And you know David you're talking about about the the content that you're manufacturing. It's interesting reading articles every now and then about the concerned that you are going to pull back from Investee then.
And big content and you gave a pretty long list is there a better idea at this point how content spending will evolve. The next few years at this company I mean, you've got probably more detailed plans around the relaunch of streaming.
Probably a better idea on linear and and the and the film slates already already Cookie next year. So any help with understanding just how much content spend micro the next few years be helpful. Thank you.
Thanks, Doug.
But we are content company, that's the business, we're in and it's our advantage.
Fact that we have these 10 polls.
The the strength of HBO right now by.
People domestically and around the world, where we do have HBO in a few markets as being the highest quality best curated service as well as.
The production of content coming out of Warner Brothers, that's really our strength, we intentionally referenced the content coming up.
Because we're leaning in we're spending more money this year than than we've ever spent historically and when there's there's been a lot of view.
View of what's going on in the remix of this company coming back coming together and it is messy, it's challenging but it's taken real courage to restructure this company it hasn't been restructured and re imagine for the future in a decade and a half and so putting having this company work as one company and putting it all together.
And having having looking at content across the platform promoting it across the platform, but as part of that we had the luxury because of this.
Spend across each platform to take a look at how it's working.
And so Casey blow us was able to look.
At all the content on HBO and was 3700 series went away.
He was able to look over the last year and a half what are people watching and what are they not watching where people spending time, where are they being nourished. We had the ability to look at across our cable channels. What what are we spending on on shows and where are they working and where are we getting a good return and all of those write offs.
We took shows off these platforms, we didn't take one show off a platform that was going to help us in any way, it's going to help us to get it off the platform. So that we could know invest in with the knowledge of what is working and replace those shows with content that has a chance to be more successful.
<unk> have larger larger audience and we're reallocating the capital how much should we be spending on HBO, how much more investments should we be making it one of brothers television and in the end we're fully committed to content, you'll see that we are committed to sport. We're committed to news and we're focused now on how do we deploy that capital in a way to generate.
Real value and get the content, that's not working off.
We're in the process of developing one length fluids, we look at it. It's one company one view on on returns and.
I see a lot of opportunity there from from the perspective of relocating the capital.
Doug on the advertising market look the.
The truth is delivery, obviously across the ecosystem is down but that said, we have been able to grow advertising and in a meaningful way with exactly that level of delivery. So my view is this is first and foremost a market issue now as I said the sports schedules that have an impact and put us at a little bit of a disadvantage in.
A quarter.
For the fourth quarter as well there is there is some.
Channel tailwind and local which obviously as you know we are less well positioned to.
To participate in but the reality is that the scatter market.
Been pretty dry right now so it is what it is.
As we know from from experience.
[noise] periods passed but.
It's not a very constructive environment right now as you have heard from from the number of other.
Players peers and across the border advertising market over the past three or four weeks.
Great. Thank you.
Our next question comes from just carry with Bank of America guarantee your line is open.
Mmm. Thank you I guess just to start you know you'll have a cyclical and secular challenges.
We all know, but you also have more tools in assets and most companies to combat.
To meet this challenge.
How you can you know if you could talk a little bit about you know how you'll use your scale what is the leverage you have.
You mentioned past <unk>.
Coming next year, which is you know should be upside like how how should we think about that I was thinking about potentially acid South and then the second question that gets more <unk> J B R. <unk>.
<unk> some of the challenges and opportunities and launching the combined service like how are you thinking about Tam what do you think any of them <unk> <unk> <unk> <unk> <unk> on the Adeline product. So is there any color you can give us on how you think about that.
Thanks, Jessica just quickly on fast.
We have we have HBO Max is and will relaunch that product in the spring as a premium product and as an AD light product and will and will begin to roll that out globally.
As J B said, we've begun to experiment with moving some of the discovery plus content in there. We also have a platform. That's that is really deficient right now and so we're holding on it were growing the fact that we were able to grow almost $3 million subs outside the U S.
Without a lot of promotion and with a platform that's not that great. We really think as encouraging as we begin to look at rolling out more broadly.
But we also see fast is a real opportunity for us and I think it's unique for US we have the largest television and motion picture Library and so this content that belongs on a on HBO Max when that product launches whatever it's called as well as the Avon service, but we could see now what are people consuming on those platforms.
Is also a huge amount of content that is not even on that platform, that's sitting with us that hasn't been put to monetize in the marketplace. Some of that we will sell which we've talked about and we've started to sell some of it will sell non exclusively some of it but we have the ability on the fast side to be.
Build a service.
Without buying content most of the players in that space are out buying content and then looking to sell that content and create a <unk>.
Vague effectively where they get a return.
On on that content based on what they spent on it we can take content, we already own a lot of it we have no participants some of it where we have participants, but it's at a fraction and get ourselves into an Avon service, which I think makes us full service and most of that has been fully amortized.
Almost all who's been fully amortize and it gives us effectively a full service, which you'll see as we come into the end of twenty-three, which is a premium service that you were driving globally with no ads and add light service, which will have a robust and attractive.
Advertising opportunity, where even in a difficult market, we're getting very good pricing and then finally, there's always a huge number of people that do not want to pay and we will be able to have them spending time with us we think with an economic model. This much advantage versus our peers and then as we learn more we can move the content through that.
Ecosystem.
Actually I think thats drunk.
Terms of scale, Jessica that's one of the most exciting points. The way we are now able to look at content decision, making with.
With people and providing with respect to from the various business units, providing data and the ability to make these decisions on a root level in the best interest of Warner Brothers discovery as opposed to optimizing individual business units.
The other more recent a point I would like to highlight where we're really in the first inning is just the marketing power of this company. If you look at if you look at the Black Adam campaign that David mentioned in his opening remarks.
This is as broad as comprehensive as.
As we've ever seen it and we're just getting started now we're going to be able to gather all the data and drive all the insights from from executing and campaign like that.
We can already see what the what the what the impact of ticket sales has been what's work, but hasnt work.
We're able to tackle this in a way that I don't think anyone has has done. It again, we're just getting started and on the sales side again, it's early days, but if you look at what.
Kathleen has been able to do at this script and what what they.
That they did it.
Don't worry on the international side I have no doubt that Kathleen and believes in prison and gearhart are going to cause it are going to drive this network portfolio hard. It's just makes so much sense at optimizing this.
Buying comprehensive portfolio.
With one.
Centralized approach is going to drive enormous delivery and remember there were on average was might be 25% of viewership on any given night, but when during the NBA, we can be up to 40% of viewership life Sports Live News Entertainment nonfiction during March madness, our numbers will be even higher and so the.
<unk> to use live news lose particularly life sports, which others did with the NFL in college football in during a difficult market, but the fact that was such a big part and effective part of the overall viewership in America gives us a chance to go to advertisers on digital news Sports Entertainment.
And so that that opportunity I think should give us a huge advantage if when when the morning comes back and we expect that we just can't predict board and.
And finally on the distribution side.
We did very well at at discovery with our traditional nonfiction package Turner did very well with their new sports and entertainment together, we make up most of the high quality and valuable piece of the basic cable bundle and so together, we're really aligned with the distributors they want the bundle.
To remain robust we wanted to remain robust and with all the discussion of the decline of.
The traditional bundle and we could see that it isn't secular decline, but the real optimistic point here is that almost all of the sports.
All of the sports are on free to air and cable and the numbers for sports have gone up dramatically March Madness was up 40%. The NBA is up 25, 30%.
And so it is the platform where people are watching sports and that sports is going to be on cable for the next 10 years and so there are certain trends you see on the other hand, you see a very big uptake on sport and long term commitment to sport on the platform, which I think will provide a steadying force and.
It will likely.
When there was some discussion bye bye Rutledge. This morning, a great operator of some challenges ahead I think one of the things that the operators are concerned about is when it comes to the big 12, and the increase in sports rights that they that they're going to have to pay the lion's share of that it increases and then Jessica maybe just to close on you or add like.
And Tim question, we see if you exclude the non accessible markets of China, and Russia, and India for a second just given the scale and different ARPA dynamics of that market. We think there's about around 2 billion.
People around the world that or.
Consumers a free AD supported entertainment and we look at a about 20% to 30% of that group being addressable on the subscription side and and the subscription side, we ultimately do see the AD light offering that now obviously.
Everyone is leaning towards is incredibly important growth initiatives for us, we're frankly, a little surprise in the HBO Max add light offering that more people have not.
Move to that offering.
And I think it says two things, which are both positive for US number one as we believe there's actually.
Some pricing.
Advantage for us on the AD free service that we can probably move north of where the prices are today and secondarily.
That we can drive, particularly which would bring the products together a.
A lot more adoption of that AD lights here.
As we saw with the legacy discovery plus products and lastly on monetization of that here today.
About two to three minutes of ads and HBO Max add life that's.
That's about half of what we have on discovery plus so we think we have as we roll the two combined products almost 100 per cent growth in the inventory available to us as we look to combine the add loads of those two products.
Alright, thank you.
Our next question comes from so, let's see you said with a J P. Morgan and your line is open.
Hi, guys. Thank you I appreciate it.
One clarification and this sounds silly, but there's been some debate.
Definition of notwithstanding I think it's pretty clear, but just to be so you're guiding toward a headline number of about 9.2 billion in EBITDA. This year.
Yes, Sir and then what's the impact from the accelerated HBO amortization in that.
And then if I if I can ask a real question maybe help us with.
Outline the changes and what market should be sort of DTC versus wholesale or partner markets. As you look at going internationally with with new markets and then potentially with some of the ones that are already out there. Thank you very much.
So let me let me quickly knock out that clarification question, then passed with the JV.
What we're seeing is.
$9.2 billion is best estimates pretty much in the middle middle of that guidance range that we've given so essentially on a year over year basis sequentially. Another improvement after Q3 Q for better and then as I said I expect much more improvement as we go into next year and this is net of the headwinds that we have.
Digested against without number most importantly, FX has been pretty significant headwind this year.
We're expecting that to be roughly $160 million for the full year. The amortization policy change for HBO content is in a similar ballpark little more for the full year, but.
But was was roughly $150 million in the.
In the third quarter as we had some some catch up.
Thanks, So that's all thanks into the the 9.2 billion number.
And on the on the.
International wholesale and partnerships angle, obviously, the rollout we laid out in the in August assumed essentially.
A roll out of a new product over the next two years in the existing HBO Max markets other than a handful of additional ones that we talked about launching in Europe . In in 2024 next year is really focused on U S. Latam.
Which are all existing HBO Max <unk>.
Markets and so there was no incremental launches in that number as David mentioned earlier.
Really we're focusing on getting the product market getting launched and then.
Reassessing as we get the product launch whether there is any opportunities to do more and more markets in the years to come but that's not something obviously, we have any visibility at this moment lastly on the partnership side, we do.
View as we have and the legacy discovery side.
That there are a number of different partnership opportunities and in fact in the last few months as we've been out in the market talking to partners a long list of partners eager to engage on conversations about how they can help us accelerate the rollout of the future product as we come to market.
Across all the markets were coming into so we're excited to work with the existing foreigners in some new partners to figure out there's ways to accelerate the rollout and potentially lessen our marketing costs and sac through those kinds of partnerships that we've done historically.
Thank you.
Our next question comes from you didn't Cahill with sounds Fargo. Your line is open.
Thank you maybe first to kind of pick up on Doug's question on content and ask at a slightly different way David.
Between the content right down in a lot of changes to personnel you've made I'm just wondering how you could characterize the content strategy now it seems like it was a little bit broken under Warnermedia before and when you think about what content is going to look like in the future. I was just wondering if you could kind of say, how it's going to be different under <unk>.
Her brothers discovery than than what it is under under Warner Media.
And then Gunnar maybe just to follow up on the free cash flow impact from the synergy when we talk about the incremental synergy guidance I know that next year, there's probably a cash headwind from cost to achieve so in 2023, specifically is the increase synergy guidance is going to be helpful to free cash flow is going to be neutral the free cash flow could it be a drag.
On free cash flow would just love to understand how we think about the free cash flow dynamic for 2023. Thank you.
A couple of things.
One we're going to have a real focus on franchises.
We haven't had a Superman movie and 13 years, we haven't done a Harry Potter movie in 15 years, what are the the D C movies and Harry Potter movie movies provided a lot of the profits of Warner Brothers Motion Pictures over the last 25 years. So focus on the franchise one of the big advantages that we have had.
So the Dragon as an example of that game of Thrones, taking advantage of sex in the city Lord of the rings, we still have the right to do Lord of the rings movies. What are the movies that have brands that are understood and loved everywhere in the world in the outside the U S. Most in the aggregate Europe Latin America Asia, it's about 40% of the theme.
Or is that we have here in the U S and there's local content and so when you have a franchise movie.
Can often make two to three times the amount of money, you're making the U S. Because you get a slot and a focus on the big movies that are loved that are 10 pulled that people are going to leave home leave early from dinner to go to sea and we have a lot of a Batman Superman optimal if we can do something with J K on Harry Potter going.
Forward Lord of the rings, what are we doing with game of Thrones, what are we doing with a lot of the big franchises that we have we're focused on franchises to we've learned what doesn't work and this is what doesn't work for us based on everything that we've seen and we've looked at it hard one is direct the streaming movies, so spending $1 billion or <unk>.
Lapsing, a motion picture window into a streaming service the movies that we launched in the theater do significantly better and launching a two hour or an hour and 40 minute movie director Screaming has done almost nothing for HBO Max in terms of viewership retention all love of the service.
The other is.
The entire library or almost the entire library shouldn't be on HBO, Max and paid for by H B O. Max There's a lot of we have an extraordinary library friends Big Bang theory, two and a half men. There's 15 or 20 series that are loved and used in a nursing the audience on a regular basis.
But then there is a huge number of series and movies that are that aren't being used at all and so the ability to see over the last year and a half what's happened to that entire library of motion picture in movies or on and to see that it's none of it's being used why are we putting in on an Avon where will be used we've looked at.
What people are watching on Pluto went on to be it's very different there loving rawhide and bonanza, they're not watching that they're not watching old series like dynasty on on maps and so there is a platform where people have an expectation and what they want to watch and we've been able to get a real.
A vision into what people are consuming and ultimately that gives us a roadmap. So what libraries really it of the changes to us and and a lot of that stuff, we might keep on there, but we don't need it to be exclusive it could also be an Avon we could sell it to someone else because no one's subscribing or staying on a particular on one of our services because.
It's there.
And.
So I think what we're really trying to understand is what has worked on the platform.
And what hasn't and then based on that.
Will determine how to operate going forward.
Let's see.
Obviously, one of the big drivers for free cash flow as well as the relationship between content cash investments and amortization, but just to go through a couple of inputs and take.
As you read.
Release $650 million a year to date.
Charges related to the merger.
The cost to achieve this goal.
Be a little more in the fourth quarter and so against that baseline next year.
It's going to be a little higher but it's not it's not.
Very significantly higher.
We are going to see a little bit of a closing up the gap between content Emard and content test.
As amortization steps up I do believe there is significant.
Low flew from the synergies again $2 billion year over year.
The tax rate against that.
And floated us through and then.
Two more points to point out one is.
If you think about the <unk> media is a very stylo business unit driven setup pre combination with discovery I believe there is enormous potential on the Capex working capital side. Those are all things we can manage.
Much differently.
That's gonna take a little longer, but we're going to start chipping away at it.
And then the last point I want I don't want to just be transparent about on a year over year basis.
One of the drags on free cash flow in the third quarter was the fact that we paid about $700 million of interest for.
Merger related deaths from a bond that's on a semiannual cycle. So you will get another.
Half a year on top of that.
2023, as well so those are the things I think we can call out right now.
That's why I reiterated that 3rd% to 50% off.
EBITDA flow smooth guidance for prozac.
One last point on content.
The audience will tell you what they love to spend time with it they'll watch it and Rewatch. It and you can see it you could see it on cable and free to air in terms of the ratings and you could see it on in we could see it on Max.
And seeing exactly what people spend time with and we look at it and we look at it hard if we have a scripted show that seven and a half million dollars and it's getting a 0.03 then.
Then that tells us that.
Someone's been written that were not committed the scripted on TNT, we're very committed the scripted but we want to measure what people are watching and what they are not if a repeat of two and a half men or big Bang does three times the rating of a brand new show that we're spending another season that we greenlit of a show that's costing us seven 5 million.
We're gonna cancel that show and we're going to try and get another scripted series that has a chance to really deliver and delight and engage an audience, but we are being deliberate about measuring how are the shows doing as I said, let me be very clear we did not get rid of any show that is helping us.
And we got rid of those shows that we can focus on producing new content that will in using everything we learned on each platform to make new choices.
Business, a failure, but we'd rather take that money and spend it again and have a chance of having a show that will engage in delight on either our traditional platforms or our subscription platform.
Actually Steve before we before we move on I did want to mention one thing because you were quoted a lot and got a lot of mileage out of your statement earlier. This week I thought you were in the last week at Warner Brothers Discovery is the greatest assets with the highest leveraged in the industry or or something like that and that our balance sheet [laughter]. Yeah. So so I just wanted to come.
And while we're on the topic of free capital I really you are a capital structure is a huge asset.
We put the structure in place with a purpose cheat largely sixth and long dated debt and so from that perspective, I feel very very good about it very limited maturity coming up over the next couple of years, we run scenarios, obviously and there is even in the most dire scenarios no requirements for us to.
Come back to the debt markets to refinance anything so it really is a bit of an asset it's not lost on us where the death is trading and as we're rolling in free cash flow that I described over the next two or three or four years. I think there is enormous opportunity for us which is going to be in the best interest of not only the equity holders, but also the dental.
So this is a real real assets.
I just saw maybe.
May be laughing when your quote was picked up on the Wall Street Journal I think this morning.
I was looking to do one more line and I will try to stay out of the news.
[laughter] one last question are better placed.
Our final question comes from Rich Greenfield with.
Your line is open.
I love batting cleanup.
You know first of all thanks for taking the questions.
David you've been pretty clear about how many mistakes the AT&T management team.
Maine and sort of put you in sort of the situation you are now in I guess, he's he's abandoning Amazon channels. One of those mistakes that you see and is revisiting that decision in the subs and cash flow tied to it.
Tied to the relaunch of H B O. Max some time next year and then second I was just sort of thinking about your comments at the very beginning of that sort of the difficult decisions you have to make ahead and.
I'm curious is NBA writes one of those just given sort of the challenges like do you need N being right given the kind of where the television world is headed right now just I'm trying to just interested in like what you meant by difficult decisions are what you're thinking about it in those difficult decisions would be great. Thanks.
Thanks Rich.
Well, we got the and in some ways. It's harder to this has been to restructure and this company and make a lot of changes in terms of people and how we approach to business, we've really seize the moment and I think it's I'm very proud of the leadership team, it's taken real courage to sit down and say we have a chance to start over here what is.
The business, how do we want to structure. This business what content should we have with the with the ability to look at what's working and what's not working what do we need to be a successful business for the future as if it was a family business. We took my wallet out put it on the table and said what do we want to spend our money on in order to have a best chance of succeeding Casey did it <unk>.
<unk> did it Mike and Pam did it Chris has done it and now we have a vision for what we believe is going to make this company strong and the most effective media company to take advantage of our diverse assets, we're not going to be right about everything but when later in.
In four or five months as we make the turn into next year, where about in the seventh or eighth inning here of getting this through.
That will.
We'll find over the next year that a lot of what we thought maybe it was a little bit wrong, but we have conviction, we have a clear vision for the future and where we're going and what we want to do and we have the courage over the last seven months and as you see this through of what's going to people who are looking at it and it looks like look who's leaving here. They got rid of this show the not doing this.
It's almost like a mural on the side of a building <unk>.
And you see a lot of stuff flowing down and it's messy and it's challenging and it's difficult it's difficult seeing people leaf.
But in the end.
We're seeing this through and we're going to come through this a much stronger company leaner with real fight in a real sense of what's the quality that we have that's going to help us to win and when you see that.
Three to four months from now I think you're going to get a very clear picture of exactly what this company is will be launching on new products and with the diversity of content. We have I think we're going to be.
We are going to be very formidable.
And the free cash flow that we're going to be generating and the EBITDA and the diversity of assets is what is what many thought when we started with this company that we weren't just the streaming company and everyone wanted to be just the streaming company that never made sense. It.
It was like the clips in the nineties.
Sub counted for a lot of money it doesn't matter what the <unk> was it does so we are focused now on free cash flow EBITDA, but we're also focused we believe that we should be a leader in subscription in Avon around the world because we have the highest quality content and to do that you can't be the only fishing boat.
You can't be the only one out there, saying the only way to get me to come is to come through my portal and so.
You know I'm not going to comment on what AT&T did it what Jeff mucus in Parsons did.
They all did made their best argument in their best sense of of how to drive this company. What we did which is lucky is Monday morning quarterback.
It's easy to do that we can now.
Take a look at what what happened with the old time Warner leadership team would happen with the AT&T leadership and how many subs did that actually get them. How what was the engagement for that how much money did they spend to get that and how much money they're spending in this area and is there any return so it's very easy for us because we can be Monday morning, quarterbacks and we're taking.
Full advantage of that and we're not gonna make those same mistakes, what we're going to change strategy more importantly, because those strategies could have worked.
It could have been that in many areas, we could be sitting here, saying, but.
<unk>.
Should Amazon and should a number of other distributors be out there sub distributing for us we're looking very hard at it because we need as many people. We think we got the best product, we should have as many people pushing it as possible we have a great relationship with Amazon wish there was a deal that we did in with a leader in sport.
And the UK with our Beattie Eurosport venture and in the Champions League. We did a deal where we got 90%. We used to we had 100 per cent of it in the renewal, we got 93% of it and Amazon got seven for that seven we produce the content for them, we get paid a fee we promote to them we get.
We work together effectively.
I was up with Andy Jaffe, two weeks ago at his house Amazon is formidable there's a lot that we've been doing together that has been helpful to us their buyers of our content before we weren't selling any content to them now we're selling content to them, we wouldn't sell everything to them, but there are there are an important company they have a broad reach.
<unk> and there are a number of other companies that also do and so when we look at ourselves and saying we have the highest quality content. We got a series of products and we have a huge number of libraries, how do we monetize those to build assets for ourselves.
And also to build cash flow off of the value of something that we have that almost no. One else has massive television and motion picture libraries, with leading iced tea and the biggest maker of content in the world and we have chosen the path of selling new content in library to Amazon, but will be selective about what we do to each.
The point of NBA, we have NBA for the next three years and.
We have been very successful with with Adam silver.
To the credit of the whole leadership team of TNT over the last couple of years NBA live is a fantastic show with bleeding showing for the NBA ratings are up almost 30% inside the NBA.
And our ratings on the games themselves are higher than the competitors in the marketplace. We also have bleacher report we have house of highlights when we're promoting the NBA across all of our platforms and when Adam thinks about the future. He thinks about it the same way that I did.
He doesn't love the none of us loved the idea the only way to watch. These games is on cable there should be an opportunity because there's a lot of people under 25.
Aren't having access to it the good news is many of them are now tuning into TNT, that's a goody for us, but it's not lost on item that we have a platform that reaches almost 100 million homes and that will be launching that new platform and it's going to be a very the technology and the overall usability of the platform is strong.
We got over 30 million people watching a house of the Dragon and watching Euphoria, where global with a leader in sports in Europe , where one of the leaders in sports in Latin America, and so none of that is lost on Adam we're having a lot of discussions with him we love the NBA.
But we are going to be disciplined in the end. If there is an MBA deal it's going to be a deal that's very attractive for us and.
And very attractive for Adam, but we have a lot of tools and that we have a lot of sports assets that no. One else has we've got a global sports business that nobody else has and.
We have a platform high quality platform like HBO Max that could generate.
30 million people watching within a short period of time for a great piece of content imagine what that could do with sport and we've had very good luck with sport in Europe . So I think it's an opportunity we liked the NBA, but we are but we are going to be disciplined and I'm hopeful that we could do something very creative.
For such a detailed answer that was super helpful.
Ladies and gentlemen that concludes our conference call for today. Thank you for participating and we ask that you just snuck in line.
[noise] Goodbye.
[noise].