Q1 2023 Warner Bros Discovery Inc Earnings Call
Ladies and gentlemen, thank you for standing by today's conference will begin shortly to allow as many participants as possible to join until that time. Your lines again will be placed on music hold thank you for your patience.
[music].
Time, all participant lines are in a listen only mode. After.
After the speaker's presentation, there will be a question and answer session.
Additionally, please be advised that today's conference call is being recorded I would like to hand, the conference over to Mr. Andrew Sleep-in Executive Vice President Global Investor strategy Sir.
You may now begin.
Good morning, and welcome to Warner Brothers discoveries Q1 earnings call with me today is David Zaslav, President and CEO <unk> <unk>, our CFO and JB Perrette CEO and President global streaming games before we start I'd like to remind you that today's conference call will include forward looking statements that we make pursuant to the safe Harbor.
Provisions of the private Securities Litigation Reform Act of 1995. The forward looking statements include comments regarding the company's future business plans prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations in providing projections and other.
Forward looking statements the company disclaims any intent or obligation to update them.
For additional information on factors that could affect these expectations. Please see the company's filings with the U S Securities Exchange Commission, including but not limited to the company's most recent annual report on Form 10-K, and its reports on Form 10-Q and form 8-K.
Copy of our Q1 earnings release trending schedule, an accompanying slide deck is available on our website at IR Dot W. BD dot com and with that I am pleased to turn the call over to David.
Hello, everyone and thank you for joining us.
We've had a very busy and productive year, thus far.
And while we have lots more to do and more to attack.
We're aggressively doing just that the diversified nature of our company continues to provide a strong foundation that enables us to weather challenging environments like the one we're in.
And still generate meaningful free cash flow.
We expected the marketplace to be challenged.
And with clear eyes, we remain confident in our strategy and our ability to generate free cash flow and end this year below four times levered.
With our streaming service as a tailwind.
Gunnar will take you through the specifics.
But for some perspective.
On a trailing 12 month basis, we generated $2 1 billion in free cash flow.
Even after absorbing $1 2 billion in cash restructuring and merger related costs.
Okay.
Turning to the quarter.
While Q1 is seasonally our weakest and we saw a challenging revenue headwinds mainly on the linear TV studio sides. We are on track to achieve this year's financial targets.
And we see a number of positive proof points emerging across our businesses with direct to consumer perhaps the most prominent.
We have a strong command of control of our DTC business, we made a meaningful turn this quarter generating $50 million in EBITDA.
And adding $1 6 million new subscribers and we feel really good about the trajectory we're on.
We now expect our U S DTC business to not only break even ahead of schedule.
But to be profitable for the year 2023 this year.
A year ahead of our guidance.
And it's worth, noting HBO, Max and discovery plus are still only available to less than half of the global screaming market.
So there is significant runway ahead of us and we are attacking this opportunity.
Max launches here in the U S on may 23rd.
With Latin America to follow later, this year and markets in EMEA and APAC in 2024.
Service looks terrific.
And there is a broad and compelling offering for everyone in the family.
We anticipate having a healthy pipeline of our new content added to Max monthly.
And recognizing that one of the real advantages we have as a company is the strength and depth of our franchises, including Harry Potter for a decade game of Thrones and D C.
We are delivering on our commitment to reinvigorate the best of them with new exciting stories for fans around the world.
While it launched the Max offering and will feature the full range of entertainment.
This is really just the beginning.
We are actively working on options to expand our lineup to include news and sports.
Acknowledging that this live programming has the power to keep consumers coming back for more and staying longer.
We look forward to sharing further details with you in the months ahead.
As part of our marketing campaign.
Under our one company strategy, we are taking full advantage of the range of available media assets companywide.
To include our U S cable networks and our popular digital outlets like Bleacher report CNN Dot com.
We're planning to rollout Max in most key markets around the world.
In an effort to reach the broadest possible audience and in keeping with our second strategic pillar <unk>.
To monetize our content in the most financially advantageous ways. We are also going to continue pursuing other licensing and output deals in markets, where either that makes better strategic and financial sense.
Oh, where HBO Max isn't currently available.
Often with paths to eventually launch Max when we're ready.
Our recent deals in Canada, and India for example, a very lucrative with no expenses against them, we already own that content.
How we serve consumers is important.
The wealth of our media assets brands, and IP and our ability to deliver diverse high quality content that viewers want to watch and we will pay for is what truly differentiates us and.
It makes the opportunity we have to drive real value so compelling.
It's the reason we brought these two companies together.
This year, we celebrate Warner brothers 100th anniversary.
This studio has historically been the crown jewel of the industry.
We are working hard to rebuild it to its former glory.
We are driving meaningful creative momentum with more and more of the most talented storytellers in the business choosing to partner with us.
On the film side after a very challenging year at the box office, we're excited and optimistic about the slate of movies coming including June two.
Barbie and DC is blue beetle and the flash.
We screen the flash in cinema Con last week and early reactions have been overwhelmingly positive.
We are committed not just to expanding the size of our film slate next year, but even more important we are committed to making great high quality films that have an impact.
As I've said, many times and we believe it.
It's not about how much it's about how good.
One of the real strengths of our company is the diversity of our storytelling.
And in this centennial year, we're especially excited to be reinvigorating, our feature animation business, which has a long history and a wealth of great IP.
Build the masks the former head of Dreamworks animation has taken the helm of our film animation group is hard at work together with Mike and Pam developing a new slate.
Dreamworks Bill oversaw a hip productions, including Madagascar, Kung Fu Panda, how to train your dragon and the crudes.
There is a great addition to our all star team.
On the interactive side, we're also seeing continuing momentum in our gaming business.
Al Gore its legacy has amassed more than $1 billion retail sales.
Over 15 million units sold worldwide to date.
And today the team is launching the game on the Playstation four and Xbox One platforms. This is our fifth $1 billion plus gaming franchise alongside mortal combat game of Thrones, a Lego games in D. C in there.
There is lots more games coming including Hogwash legacy on switch later this year.
Another area, we're very focused on is AD sales.
Our results for Q1 continue to reflect the current soft ad market.
We are optimistic for a gradual improvement and an eventual upturn in the second half of the year.
And a couple of weeks, we'll host our upfront.
Last year's upfront was right on the heels of closing of our merger.
Since then we've refined our sales organization and our approach.
And the team is executing against what we believe is a strong strategy.
We're also advantaged by the diversity and strength of our AD supported platforms in particular sports and streaming are two key areas for this year's market.
We are extremely well positioned in both.
Looking ahead to the next couple of months, we'll host the MBA Eastern Conference finals in a few weeks given the four teams in the mix, it's shaping up to be a great series and.
And in June we've got the Stanley Cup finals on TNT.
The first time ever that one of the four major professional team sports will air its final series solely on a cable network, we're very excited about that on.
On the direct to consumer side, we now have more than 15 foundational advertising partners.
Surely on HBO originals, something you couldn't buy just three months ago, and a truly unique offering for brands. The Mercedes Benz title sponsorship of succession is a good example, and.
And our first of its kind opportunity.
The combination of impactful campaigns and.
In a limited AD watching experience for consumers.
On average AD supported subscribers will see one to two minutes of ads per hour represents a real win win for all involved.
When you consider the quality of the service the attractive price point and the limited amount of advertising, it's simply can't be beat.
We're also providing huge value to advertisers by creating these Sunday night Buzzy shows like Euphoria game of Thrones, the last of US and of course succession.
These shared experiences enable advertisers to build the desired reach quickly.
This is expected to be a big year for news as well with the presidential cycle kicking off soon.
We anticipate real growth out of C. N N will be selling heavily into the upfront for town halls primaries and conventions.
Needless to say, we've got a lot of irons in the fire in this busy year is looking to get even busier.
We're driving leverage down.
Generating free cash flow and continuing to build a sustainable business for the long term.
And as the macro environment begins to improve we believe given the efficiencies we've put in place.
And then control and our diversified portfolio of media assets storytelling, IP and talent, we are strongly positioned to achieve even higher free cash flow and EBITDA heights, and ultimately meaningfully grow shareholder value.
And now I'll turn it over to Gunnar and he'll take you through the financials and the specifics of the quarter and what's ahead Gunnar.
Thank you David and good morning.
On balance I'm very pleased with where we are and very encouraged by the progress of our priority initiatives, which are all moving forward as planned.
We generated 12% in constant currency EBITDA growth this quarter, a strong starting point for the year and also the first quarter of EBITDAR growth since closing the merger.
I remain confident in our guidance of adjusted EBITDA in the range of low to mid $11 billion.
And one third to one half conversion to free cash flow.
With net leverage at the end of 2023 comfortably below four times.
As always there are a number of moving pieces in this quarter is no exception, so I'd like to address the key puts and takes impacting our results and outlook.
Starting with D to C. As we enter this next leg of the journey kicking off with the launch of Max on May 23rd we're already very pleased with the traction we are seeing having generated $50 million of EBITDA this quarter.
Perhaps more importantly, we're continuing to see improvements across key operating kpis such as in our retention metrics. We also added $1 6 million subscribers globally in part due to the strong creative success of the last of us.
We've driven a healthy amount of last thing efficiency improvement across this business through the initial phase of D to C integration in fact, DTC operating expenses were down over $760 million or 24%, excluding FX on a pro forma basis in the first quarter.
All of this now provides much greater clarity on the path forward to establishing a sustainable platform set up for a dynamic and profitable growth for years to come.
As we relaunch here in the U S.
And plan additional launches later in 'twenty, three and into 'twenty. Four we will continue to be guided by a focus on prudent and rational investment.
Additionally, we benefited from greater insight into the efficiency and effectiveness of our marketing efforts over the last 12 months and.
And we've seen that we can do more with less as.
As Jamie noted during our precedent we will undertake the largest marketing campaign in the company's history to support the launch of Max. This was of course anticipated in our internal budget and guidance.
We will continue to focus on driving efficiencies throughout our D to C. Non content cost structure as we launched <unk> around the world and get more and more of our digital products on a common platform as such we expect the DTC segment to continue to show improvement with peak EBITDA losses for the year in the second quarter and when I say peak.
I'm talking around $300 million of yourself.
In fact, we are tracking ahead of our profitability targets and now expect to be profitable in the U S. On a full year basis. This year that is a full year ahead of our original plan of breakeven in 2024.
And I remain ever confident in our outlook of generating $1 billion or more of profitability in 2025 globally.
Finally, I would like to remind you about the approximately 4 million overlapping subscribers between HBO, Max and discovery plus consistent with what we outlined for you last summer.
While we intend to keep discovery plus going as a standalone product. We expect a large portion of these 4 million subscribers will likely turn off discovery plus the exact cadence of course being unclear at this time, but we do expect a fair amount of it to happen in the first few months after launch.
Turning briefly to the other segments of our portfolio starting with the advertising market.
As expected we did see a modest sequential improvement in Q1, when adjusting for the Olympics.
And we do see this underlying trend continuing into Q2 on a like for like basis that is after accounting for the NCAA men's final four of last year and the Stanley Cup finals. This year, which combined will account for a net 200 basis points headwind the global networks advertising revenue.
While we see this as encouraging visibility remains limited and the improvement is gradual.
Though the market remains challenged we are cautiously optimistic, particularly coming into the upfront, which will take place over the next couple of months with discussions ongoing we will soon have a much better handle on Q4 and 2023 2024 season.
We see a particularly strong advertising opportunity on Max.
With respect to the more traditional ads on shows like friends and Big Bang theory, as well as the very impactful in high profile.
Opportunity.
Originals.
You will hear lots more about this at our upfront presentation in a few weeks.
Recall theres really only kicked off in February and were moving slowly and deliberately ensuring a high quality rich advertising experience and we see significant further upside for this product line, particularly when the advertising market improve.
Briefly on our international markets on the whole they continue to perform relatively better led by key markets like Poland, The Nordics and Italy, with the UK, Germany, and Brazil on the weaker side, though as in the U S. There is limited visibility.
In the studio segment.
There are a number of moving pieces that will be helpful to unpack, obviously hardware as legacy was the key driver here, having performed amazingly well. It is thus far the best selling game across the industry with over $1 billion in retail sales and it is on track to be a top game for all of 2023.
Studios results were however negatively impacted by disappointing box office performance and this was exacerbated by a very difficult comparison against the success of the Batman last year.
<unk> TV licensing revenues declined year over year against certain large deal in Q1 of 2022.
As David mentioned, we're coming up on the 2023 summers late and early reviews and tracking for the Flash premiering June 16, and Barbie on July 21st look very promising.
Both titles have enjoyed major buzz and we're leaning in.
Keep that in mind for the second quarter when the studio segment will see the expense associated with these marketing campaigns or the revenue opportunity largely impacts Q3 and beyond.
Now let me provide some color on free cash flow, our financial North Star as you know as a reminder, free cash flow of negative $930 million Q1 of this year is not comparable to the positive $238 million reported last year as the ladder represented discovery as a standalone company and.
While our first quarter free cash flow was negative as guided to on our fourth quarter earnings call. We have made significant progress with strong improvement versus the underlying trend in the prior year when Warner media had heavily negative free cash goals.
A few additional key factors to keep in mind first Q1 for both legacy companies has always been the seasonally weakest quarter in part due to the cadence of the production schedule over the year and the timing of certain payments such as for sports rights.
In Q1, and Q3 carry the additional burden of the semiannual coupon payments in large part for our merger bonds and impact of over $800 million included in our Q1 free cash flow.
Lastly, Q1 also contains significant and expected cash out from restructuring and integration costs close to $500 million during the quarter.
Given the quarterly puts and takes I'd like to point to the trailing 12 months free cash flow to give you a better sense of the true run rate.
Our trailing 12 month free cash flow is now at $2 1 billion with a very clear path to our guidance range. The key drivers for the balance of the year. Our number one expected adjusted EBITDA growth backend loaded this year as transformation initiatives continue to unfold and hopefully with a little help from the AD.
Backdrop, even though I should say I have confidence in our guidance range, even if AD sales don't fully recover and age two against the much easier prior year comp.
Second seasonally positive change in working capital versus the drag in Q1.
Third a significantly narrowing gap between cash content spend in amortization as our D to C business absorbed sequentially higher amortization expenses, and we deploy content cash with a more and more rigorous focus on ROI.
Finally, the cash benefit from key transformation initiatives will be backend loaded over the year, while cash out for restructuring and integration will be more frontloaded. In fact, our trailing 12 month free cash flow number at the end of Q1 contains $1 2 billion of restructuring and merger related cash costs in this line item.
We expect that these factors will contribute to a higher conversion rate in the second half of the year and slightly again with a disproportionate amount in Q4, not unlike our nearly 100% conversion rate in the fourth quarter of last year.
Looking ahead to the second quarter, we're expecting to see a significant positive swing from negative $900 million in Q1, two around positive 900 million for a roughly cash neutral maybe positive H, one free cash flow overall.
This will support further debt reduction this quarter on our way to sub four times leverage.
Separately as you will see in our 10-Q, we temporarily drew down $750 million on our revolver in April to accommodate the intra quarter timing of sports rights payments I expect this to be fully paid down by the end of this month.
To sum up my discussion of free cash flow the level of transparency into and focus on free cash flow and its drivers has changed dramatically over the past 12 months and we're in a strong position to capture this tremendous value opportunity over the course of 2023 and beyond.
In closing as we lapped the one year Mark since closing the merger candidly it feels like three <unk>.
I do come back to the statement I made a few months ago that we've turned the corner at W. BD I continue to view the structural heavy lift is more behind us than in front of us and I see more and more opportunity with everyday I am spending with the iconic brands and a massive global footprint of this combined company.
With billions in efficiency gains already in implementation, we really are still in the early innings of unlocking the full potential of Warner Brothers discovery, we remain as well positioned as any to lean into the many avenues of growth in front of us.
With that I'd like to turn the call back to the operator, and David JB and I will take your questions.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press star one again.
Your first question comes from the line of Doug Mitchelson with Credit Suisse. Please go ahead.
Oh, thanks, so much for taking the question.
David and J B I think most interesting how would you define success for the launch of Max or the relaunch of Max as you want to define it I think.
There's a lot of discussion in terms of choosing Max's brand and the need to build out a rebuild that David you mentioned actively trying to include news and sports in the lineup.
So I'm just curious whether its engagement whether its subscribers whether its ultimate profitability.
How should investors think about what to expect from Max in the coming quarters and in Qatar.
I think you made some strong statements in your prepared remarks, but obviously a lot of investor focus on free cash flow generation and balance sheet here.
Yes. The general question is what's your level of confidence in our balance sheet targets over the next couple of years.
What gives you that confidence, especially with the euro being backend weighted thanks, so much.
Thanks, Doug.
So we're excited about the 20 <unk>.
Look.
We've turned the corner on Australian business, we had a different view of it we've we've focused on it very hard and we built what we think will be a very strong independent business and it starts with profitability.
And so we made $50 million this quarter, our U S streaming business will be profitable for the year and we have real scale and.
And when you run a business you are looking for growth, which we're going to get in the streaming business and we're driving to get throughout the company and there were a number of areas, where we think that we are as we know that as the economy improves we will see real growth, but the key here is.
Or are you a stream business is no longer a bleeder.
It's hard to run a business when you have a big bleeder.
So getting this business under control focusing on what people love to watch how do we create content that people love and now as we launch Max we'll be able to nourish and delight subscribers with the greatness of of HBO, which on Sunday nights is really a color.
<unk> moment, whether it's white Lotus houses Dragon the last of us succession.
And then put it together with discovery, which is the discovery the discovery content, which has been really strong for us. So.
Number one we want an easy smooth transition that's why we're not doing anything with pricing, we focused very hard on letting everybody know how to make that transition. We have a right now we have a really good hand, and so let's make the transition we got technology, that's far superior in terms of.
Delivering the platform itself and how it can work against all this great content, but let's do a smooth transition and then have people discover the quality content that diversity of content and the quality of the platform itself, which will only accelerate growth Jamie.
Doug just to add on to David.
In the very near term migration success as sort of one key metric are you getting the customers who are on HBO. Max today successfully migrated over to Max and then over time there'll be three other metrics and fourth I will come the three would be brand awareness. Obviously, we're building a brand with Max now that is new that is a different proper.
<unk> a broader proposition for something for everybody in the family some are to customer satisfaction.
Number three engagement we.
We talked about on the April 12th event, a lot of it is around seeing all this content coming together and the breadth of the proposition driving higher utilization and therefore, helping retention. Those I think are the core ones and the initial few months and then over time, obviously as that flywheel.
We obviously want to see subscriber growth and scale as the additional metrics. So those are the ways that we'll look at success.
Alright.
Doug on the on the free cash flow question as you as.
As you just heard me say in the prepared remarks, I have I have a high level of confidence in our guidance and our ability to deliver here and taking a step back there is no doubt the environment continues to be challenging we're working against pretty significant.
<unk> and AD sales.
And as I laid out we see a gradual improvement for the second quarter, but it is gradual so so there's that.
But what you're also seeing in our results is what we've referred to as the built in hedge right. We've got a great game hardwoods legacy box office was a little weaker but across the entire footprint of the company managing as one integrated company, we have enormous opportunity and.
So we don't want to be in the business of predicting at market developments in the second half as I said I have confidence in our guidance without assuming a.
Complete turnaround here, because we're focusing on what we know and what we know is the control that we have over the initiatives that we put in place over the past 12 months and they are we're knocking them out month after month quarter. After quarter. We've got systems coming online. We've got individual workflows that are going from from 10 to 12 hours of pop to three.
Three minutes.
There's a lot that's happening and we have clear milestone scheduled out for the rest of the year.
And looking at that.
No.
Great confidence that we're going to continue to deliver these these improvements and as I pointed out earlier on the cash flow side.
Even more exacerbated.
Then on the P&L side with the seasonality of our free cash flow and the $930 million in Q1 was pretty pretty exactly in line actually a little bit better than what we had budgeted for.
With that I have full confidence we're going to deliver for you guys.
Thank you all.
Your next question comes from the line of Robert Fishman with Moffett Nathanson. Please go ahead.
Hi, Good morning, I have one for David and one for <unk>.
First David can you expand on this strategy you mentioned in your prepared remarks, and maybe the financial benefit of licensing your HBO and Warner Brothers Library content internationally.
Some of the deals that you discussed and how do you balance those licensing deals with your ambitions to scale Max outside the U S. If and when you choose to launch in those markets.
Then for JP and getting there on DTC.
Anything you can share about the DTC retail versus wholesale trends.
Noticed that wholesale revenue dragged down overall DTC revenues and just whether that wholesale pressure should continue throughout the year. Thank you.
Thanks Robert.
Yeah.
We are we're focused on taking HBO around the world.
Fact that we have.
Real scale in <unk>.
Round the world that we have content in every language we have channels in every country to promote it is a real advantage for us, but we're really driven by free cash flow and long term free cash flow growth.
And so if theres a market like India, where we could we could structure a deal where we can make a lot more money.
Bye bye.
By licensing our great content in that market.
With an option at the which we always have at the end of that deal to take another look at that country with our platform. That's already built we're not building a new platform for each country and see if we can go in ourselves can we generate more long term profit and free cash flow and so it's really an economic analysis.
You will see in most markets it will be us building asset value owning it driving it for long term.
Value and growth you saw us do it at discovery, we were the first outside the U S. We were in 200 countries and it generated a long tail of free cash flow.
<unk>.
EBITDA growth for us so I'm very optimistic we're less than 50% of the countries. It's very hard to have a business that's profitable just in the U S.
I've always thought that you really need to be above the globe and that's the advantage that was the value creation of the <unk> companies that they had that scale, we own all of our content and the idea that we're starting off by having a <unk>.
Business is profitable this year.
In the U S. And then we go on this journey of driving it outside the U S. With a strong platform. That's already built I think is bodes very well for us.
Robert I would just add to what David said Theres two two filters as we look at it there is a strategic filter and financial filter that David just talked about which obviously is <unk>, which is a market like India. If we don't believe we can be profitable as a streaming service within a three to five year time horizon at the end of the day right now that's not going to be our priority focus and so if there's opportunities to license it.
A bunch of money off the table to help support our growth initiatives in other markets, where we think we can scale more profitably and more effectively we do that number one number two there's just a practical reality that some of these licensing deals are done in markets, where we're just not going to be ready to launch from a platform perspective as David mentioned in his prepared remarks, we've got a timetable.
To rollout, our new product and convert and migrate our existing HBO Max customers over the next 12 months plus.
And some of these things are going to take.
Into 'twenty, five and even beyond to launch in new markets for our platform to be ready and so in the meantime, it just makes perfect sense for us to take as much money off the table as possible.
And so.
Yes, that's the thinking.
The added advantages in these markets there is still seeding our brands in those markets. So we're getting value.
The brand itself is being driven as quality curated and then we have the handoff. When we think that market can be profitable and we have I'm sorry, one other thing I'd say is in all of these deals oftentimes, what we've done which is better than what we have an existing licensing deals is ensuring that when those deals expire we have stronger cliff for the content to come back.
So we can actually when we're ready to launch if we assume we're going to launch in those markets at the end of those deals we get more of our content back immediately Robert the only thing I would add is on your revenue growth in wholesale question too.
Two things to keep in mind number one Q.
Q1 had a bit of an overlay with content sales revenues and as we as we pointed out in the prepared remarks.
The AD market also on the digital side isn't the greatest right now.
See a lot of upside opportunity here as that market comes back and specifically for wholesale remember.
Remember that our subscriber base contains the linear HBO subscribers that are obviously showing similar trends to what we're seeing in other parts of the linear ecosystem Needless to say, we expect the total to be a growing business.
We'll see how the launch goes in May we're looking forward to getting that product out I pointed out some of those them.
Overlapping subscribers, we will see how those wash out, but we're definitely looking for for revenue growth for <unk>.
Half of the year, and then and then many years to come.
Great next question.
Yeah.
Your next question comes from the line of Steven Cahall with Wells Fargo. Please go ahead.
Yeah.
Good morning, maybe first David in JV on DTC profits that are tracking ahead, just curious what's performing ahead of your expectations. There is it the subscribers and revenue is it more about the cost reduction.
And I know, you're new into the Max launch domestically, but I'm just curious if youre seeing legacy HBO subscribers, which I think David you were talking about on CNBC. This morning, if youre seeing those folks engaged with the discovery content, it's kind of different genres, but I know thats. The hope so just wondering what kind of early trends you might be seeing there and then.
Gunnar on the adjusted EBITDA guidance for the year I think it still implies low $11 billion from your comments it sounds like the macro is still a little tough, but youre bullish with the incremental U S. DTC profit. So I'm, just wondering with DTC performing better and no change to that guidance is there anything thats performing worse or is that better.
Kind of in the range as we think about all those different components. Thank you.
Hi.
I'll start with the second with the guidance quickly because youre right, obviously, the DTC point.
The big Big positive driver here, the most important point as I laid out we have very clear visibility into our transformation initiatives.
The impact that's going to have on the cost base also for the studio definitely.
A support here for the second half of the year very strong.
Our slate that we're really looking forward to launching and the revenues of those are going to hit from from Q3 onwards, again don't want to speculate about the linear business, but remember that the comp in the second half is going to be much more beneficial because especially the fourth quarter last year was pretty anemic.
In the scatter market.
But at the end of the day, we still have a lot of shots on goal here and it's a hit driven business, especially on the studio side. That's what we're giving you a range and I feel comfortable with that range.
With what I know today.
Okay.
When we think about Max as we launch.
We have real scale.
Quality content.
Our broader aperture.
The real challenge.
As the chart.
Very difficult to build a strong business with churn the churn on discovery plus is quite low.
Churn on.
On HBO Max is high.
And so driving that churn.
Is.
As or maybe more important.
Then driving the growth if we can drive down the churn the growth will be very substantial and so we have a series of attacks in order to do that the primary one is how do you narrow some more people in the family and the more people use that we've seen that we've been at this in Europe for more than eight years, the more people that use it in the family good morning.
The more engaged people are.
The broader the offering.
The lower the churn we also have a technology advantage now in terms of catching people that want to buy the product that warranty that we werent able to reach out to.
And this is a business of artillery, we're adding a lot of artillery here to the offering in order to get more.
To get more viewers in the family engaged and excited.
About the amazing quality content.
That we have but we have all weapons.
And we have sports and we have news and those are on the sidelines right now we have a great product we're going to.
That's now going to be profitable for the year, let's drive that.
Let's drive the brand.
And know that we have we can move to the left to the right with sports and news, which we've done in markets in Europe , which has been additionally, advantageous JV yes.
Steven just to Echo what David said, we've seen it across multiple metrics, we've seen it across retention as David rightly pointed out we've had in the first few months of this year record low churn on HBO Max with the churn is still it's still hiring it's still high but we've been with the acceptable range in order to build the kind of.
Business that we will build and as we've talked about at the April 12th event that was all done through a kind of what I'd call. It slightly more analog attack plan.
Now getting to a tool and a platform as we launch Max that we think has a lot more ammo to be able to actually attack churn and more aggressive fashion. So we think we're just at the beginning of that.
Swing. The second is we obviously had price rises in the U S as well as a few of the Latin American markets and the reality is the great news. There is we've seen much better reaction and much better retention as well on <unk>.
Increases in those markets and so that's been a positive we've seen efficiencies.
In.
Across the board in some of the items that <unk> talked about.
And then obviously over time, we've seen some scaling but we've been measured in our scaling.
And so.
That's been a great and as it relates to the content.
Cross pollination realities, we've done very little so far, but we have done stuff with Magnolia for example, and as you heard US I think to hopefully talk about before it was a top 10 performer on the service at launch and even a top five.
In the initial week of launch and so we feel very positive about what that means and as we've cross pollinated content outside of the U S. We've seen similar trends of great reaction and reception from HBO Max consumers to the discovery plus content.
So when we go full throttle with it when the Max comes together, we feel very optimistic.
If I can just add one thing from the perspective of a longer term outlook here again.
We gave guidance.
A year ago.
Around how we see this DTC business developing as I said earlier today many of the operating Kpis are tracking much better than what we assumed again the big thing is getting this product launched and then we will learn so much about.
Assumptions that are now assumptions and hypotheses.
Two to three months.
Those will be backed up by a lot more actual data. So this is going to be super important period, but needless to say with the U S breakeven.
And actually hitting profitability for the full year happening this year a full year ahead.
Now remember as we said before we are obviously, losing money in the business internationally as we are launching market and as we are earlier in the <unk>.
The maturity.
Curve in many of the international markets and Thats going to continue but as I said earlier, we've got that one 1 billion plus guidance for 2025 for the entire combined business and we'll update that.
On the basis of what we're learning.
Once the product is in the market.
Great. Thanks for your question.
Your next question comes from the line of Peter Zaffino with Wolfe Research. Please go ahead.
Hi, good morning, and thank you.
Subject of free cash flow.
Adjusted for one time charges, you mentioned that the last 12 months. The company has produced a little over $3 billion of free cash, adding that one plus of onetime charges to the two class of underlying.
If your expectation is that synergies will contribute $2 billion in 'twenty three.
It seems like you.
Your free cash flow.
As an easy path to $4 billion, which is within your guidance range I'm wondering if you'd add any significant puts or takes to that analysis and specifically is the DTC upside that you described today the idea that.
EBITDA will be 1 billion better than previously expected in 'twenty three incremental to the math I just laid out thank you.
Both Peter again.
In the current environment I wouldn't characterize anything as easy but.
I have very very high confidence in the range that we laid out.
We have confidence in the ability to generate these these synergies youre right on the on the trailing 12 month number but.
It's a lot of work we have a we have line of sight.
And.
We'll take it from there I don't want you to take this isn't an upgrade to our cash flow guidance. So we were I think we were.
Were among the first to say that the advertising market was facing we're starting to be challenging.
And so.
We have been.
Pretty careful.
In.
Projecting because you can't have an advertising market is going to turn and when it's going to turn and so for purposes of how we looked at this year the <unk>.
Market is quite challenging.
It's improved a little bit, but it still remains a really challenging environment.
But the good news for us as we built that.
Into our projections for the year and into how we talk to you about what this what we'll face this year and how we will perform.
Great next question.
Your next question comes from the line of Bryan Kraft with Deutsche Bank. Please go ahead.
Hi, Good morning, I wanted to ask you about Hogwarts legacy sales have obviously been extremely strong to date can you talk about what you expect for sales of the PS four and Xbox one versions, which I think become available today.
Maybe just relative to sales to date, how much of a lift could you get and also I wanted to ask.
How the next say X hundreds of millions of dollars of sales would be would look from a margin perspective relative to that first $1 billion because I would assume that there is a lot less marketing and amortization running through in the second quarter and beyond so just wanted to ask about that as we think about profitability for the studio going forward. Thank you.
Thanks, Brian .
We have a very.
Very good.
Our gaming business with 11 different studios.
A real talented capability.
But the real differentiator for us as a company is.
We own our IP.
And that IP belongs to us and we're developing it in some cases, we may decide to develop it with a third party game.
Technology company.
<unk>.
We may be the only media company that owns whether it's the DC universe, Harry Potter all of the content that we own game of Thrones, that's for us to deploy and I think that's particularly strategically important because if you look at Hogwarts legacy a big piece of the success of that game as you go into it if Europe .
Player you go into that game and you're in that world.
That's kind of a new concept before it was really.
It was gaming and it was storytelling and now it's very difficult to figure out what anyone's definition for the meta versus.
When we launch a product as a motion picture of long form story on unmatched or HBO.
And then we have a game.
That gain belongs to us, but now there's this tweener, which is it may be in the next couple of years that we launched our Superman movie and then.
People spend more time and Theres more economics of people just hanging out in the Superman World and universe, and the fact that we own all of that.
Is something that I think is going to be really important as we look for as well as technology develops and given the amount of time people spend on gaming.
We don't want to be in the motion picture and story and long form storytelling business and have somebody else in the business of hanging out in those worlds because those worlds I think theyre going to be quite profitable in the years ahead.
And Brian to the horse legacy.
Obviously, the Gen eight releases going out today.
Is is important.
I would say obviously those consoles are a much smaller base than the current generation consoles that we released back in February . So, it's obviously a much smaller portion of the hole, but nonetheless important I think the other big call out is obviously, the Nintendo switch released which will come later this year.
We see that as probably a much bigger.
Install base and our fan base.
As it relates to the franchise of Harry Potter, which obviously appeals to a very big audience globally, and a more than in markets like Japan, where Nintendo has a big footprint in Harry Potter skews very strongly in terms of popularity, we see a much bigger upside probably from that release certainly than the gen. Eight.
So that's kind of how we see the rollout over the next few months.
Yes.
The margin profile of Brian is not going to change materially.
We'll be a little lighter on marketing, obviously retail price points are a little lower so I think from a gross margin perspective, a little bit.
No material change.
Thanks, very much I appreciate it.
Your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities. Please go ahead. Thanks.
Thanks two questions.
David If you step back and think about the last year.
The heavy lifting is done integration restructuring and now the focus is on operating and building your businesses, where do you see.
The most opportunity and maybe you can touch on timing beyond the existing business you touched on games, but I'm.
Sure.
Our business plan fast you've mentioned in the past you're talking about driving your franchises deeper in animation. You. Just mentioned you hired ahead of animation so.
It's a huge driver for universal So maybe if you could maybe there's something I'm missing.
And then secondly on sports.
You kind of alluded to it coming to Max I Wonder if you can say anything more about that and maybe touch on the NBA. What do you think the timing is and ways to slate are there ways to slice and dice the rates among the various players. So that you ensure it's a profitable contract in the next round.
Thanks Jessica.
There is.
When we look at this business.
Right.
Reset the business for the future by looking at each company and saying what should this how should we be structured to have the best chance to sustainable growth in the world today.
We took out a lot of layers, we built a new leadership team, but we still have a lot of the benefits that will be flowing through this year and next year and we're still finding it we're still opening up some closet stuff walks out then.
Which I think is a good thing more opportunity and we've got some businesses that arent doing well.
Warner Brothers turns 100.
And they've had two of the worst years.
If you look back at Warner Brothers.
Really just very.
Difficult.
Very difficult on every level in terms of.
What was turned out and so we think we've turned the corner on that we've got a very strong leadership team in place now we got James gone and Peter working very hard on DC, which is going to be a very big growth driver for this company.
So very bullish on DC and.
We the Superman script first draft is done.
Is he is he is on a mission from God.
And I think it's a really good moment for us to prove out on D. C. What we got and how strong it is globally for long term sustainable growth.
We got some more movies coming up that are better we've been working hard on fixing and enhancing them and investing we said no moving before its time.
With Barbie and flash we have two very good movies due to very strong.
And so I think the slate coming up now that will make a big difference we've lost a lot of money in the motion picture business.
<unk>.
And making that turn is important.
<unk> to build on on Max.
We haven't done much with animation at this company, we own Hanna Barbera Looney tunes.
<unk>.
If you take a look at at animation.
Critical we have we have three animation studios.
And we don't have a lot of.
Uh huh.
Production in terms of it's not productive in terms of free cash flow, it's not productive in terms of market share it's not productive.
In terms of growth.
So driving that and we now have a look.
Really strong leader our leadership team is in place.
This was a.
This was formula one and we're dealing with a very difficult environment and it's it's.
It's raining in the track is wet and it is a challenge.
We've got a leadership team of race car drivers here.
In every case.
And so we've got a lot of confidence in Mike and Pam on the Warner Brothers side and.
The games business is just getting started.
I think it's something that people didn't really pay a lot of a lot of attention to and maybe the most important portion is.
The fact that we.
We have this great diversity of assets, it's hard to predict what's going to go on but we've restructured this company now we're really tight.
We're really tight and we're continuing to figure out how do we drive productivity. So we can invest more in storytelling. That's all we do and.
Right now it's sort of the.
The environment is challenged challenge challenge, but as things start to pick up and they will go in different areas and we can't predict exactly when you're going to see a very quick turn at this company. So the idea that we can end this year drive toward to be less than four times levered with a very tight cost structure.
With command and control of this business with strong brands that people love around the World and then.
All of a sudden things.
Things improve a little bit and you'll see an acceleration.
Yes.
Look.
I was just so atom two days ago at the Knick game go next Big night at the Garden.
<unk> been waiting a long time for that one.
And but.
Well.
We're doing a terrific job with the NBA when you look at Berkeley and Ernie.
That team and shaq.
Programming, we're putting on we're setting records with the NBA was setting records with.
With hockey.
We also have March madness, where we did very well, we couldnt do as well with the with the marketplace because.
Sports is relatively strong but sports used to be strong enough that it was also able to help you with the rest of the business and that was happening for a long time and the market was just quite soft and so we're able to take advantage of the sport, but we werent able to take advantage of the piggyback Halo and I think thats true in the industry. It just got.
More difficult but between.
Baseball playoffs March Madness hockey, we have we have long term deals that are quite favorable to us.
We like the NBA the deal.
Deals coming up in 'twenty five.
There's lots of lots of ways it could be re conjugated.
We did a very favorable deal in the UK with our BT Eurosport business, where we ended up with 90% of the football soccer games, and Amazon got less than 10% of the <unk>.
Champions League games, we produce that content for four Andy Jaffe.
And they promote the us we promote to them and the economics of that deal were.
Very favorable for us and so there is lots of ways to re conjugate it.
We like the NBA, we hope we can get there, but we're going to be very disciplined we work very hard to build this company to drive profitability to have a strong balance sheet to provide real growth and real free cash flow. That's the long term sustainable nature of this great company and we're not going to jeopardize that for any piece of IP.
I would like to add one second.
Strategic.
Operational point, but nonetheless, I think it's super important Jessica and that is our.
The arguments were spending $20 billion of content a lot of that still goes through.
Siloed systems.
Still imperfect processes and in many cases still.
Mindset Thats very business unit oriented so I have no doubt we are in the very early innings of looking at this.
As one Warner brothers discovery contents that we talk a lot about the stuff that we discontinued because it didn't make sense financially I think the opposite is true as well I think the company also passed on very very interesting and attractive investment opportunities just because some intercompany budget wasn't in place. There. So all of that is going to change will get much better in <unk>.
<unk> capital as a company and we will get much better.
The day to day operational management of spending that cash.
We just harmonize those processes.
Centralize those teams that were all fragmented so looking at that the ROI on our capital in the ballpark of 2000 20 billion hopefully growing over the next.
Few years.
Is set to improve and I have full conviction in that when we talk about our marketing campaigns.
One of the things to bear in mind is.
We're using our platforms now that wasn't happening.
We are really hyper focused.
As I said on many nights now we're getting 48, 45% close to 50% of all viewership broadcast cable on any given night, we have 25% to 30% of viewership on the platform and using that using bleach or in house of highlights, which is a very young demo using CNN dot com.
So yes, yes were the campaigns are bigger, but we're one company and so the ability to promote on HBO on our own platforms is a big savings, it's a big savings for us internationally and we're deploying it.
Great. Let's go to the last question. Please.
Your last question comes from the line of Matthew Thornton with curious Securities. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question maybe a couple on Max if I could.
Could you update us just how you're thinking about migration later this month as in terms of any friction as folks go from one app to the Mac just latest thoughts on on any potential friction.
Actually there on how you're managing that.
Secondly, you talked about the overlap of discovery plus users that also have.
HBO Max what about those that don't and how youre attacking and trying to up sell those to the.
The higher price point.
Max service any color there and then just a final one I think this was mentioned on a prior question, but any thoughts around.
A fast here Im just trying to think about the fact here around Max helped drive top of funnel will help drive advertising help monetize deep library any incremental updated color there would be great as well. Thanks so much.
Yes, Thanks, Matt just on the migration 0.1st a couple a couple of things number one is remember there has been no change in the billing process. So as it relates to revenue. There is no change and there is no migration as it relates to billing so revenue and billing contains continues to be exactly the same irrespective of whether somebody has actually clinical <unk>.
Migrated I accepted the new app or downloaded the new app, if they need to and number two is as we said at the April 12th event. There is a large portion of the base that we will have to do absolutely nothing where.
The app will automatically convert and upon streaming again, you'll have accepted the terms of use and youll be often running for the portion of the base that actually has to download redownload. We've done everything we can to make it as seamless as possible including.
Not having to input youll basically two clicks to get to the streaming again. Your video content you have no need to your user name password will all be migrated your watch list.
All your history will be migrated and so we tried to make everything is possible now inevitably in these processes youre going to find some friction, but we think it's fairly limited in terms of the subscriber risk associated to the migration.
So we feel very good going into it we've tested it we're all ready for the migration.
And.
The flip side is on then switching to the discovery pluses as Gunnar said, we do see about 4 million subs.
Largely in the U S. But there is some of that internationally as well that overlap between the two services and obviously, we're going to be doing everything we can.
To upsell those that are not subscribed, but as we said again.
Lip side is we're not going to be too.
Two in their face about it at the end of the day, if people want to stay subscribed to discovery, plus and Thats the environment they prefer.
That business by itself is profitable and we will continue to maintain it and serve them there, but we will over time initially through marketing efforts try and see if we can get them to come in and sample. It will have offers that incentivize them to sample. It for some period of time at favorable economics.
And we will see how successful we can be and upgrading them.
Thanks Al.
Yes.
Oh on fast.
So look on fast we always believed in a hybrid what we call a hybrid strategy, which is ultimately first and foremost kind of what we call channel syndication, which is ultimately we realize that the platforms.
The distributors out there there are many who have the scale and the size that we want to get our channel portfolio out there and viewed as an audience aggregation and advertising business, we've already gotten out with Roku and <unk> and we've been very pleased with the initial success with a very small, but a handful of channels that we out there already we will.
Continue to look to see if we can increase that volume to your point for a second third fourth monetization windows for certain content.
And then we're continuing to explore the owned and operated strategy.
And at some point in time longer term, we do see this opportunity for this WB TV.
Brand and platform to exist in an owned and operated environment I think at some point that'll be dovetailed with the state of the advertising business and we want to make sure we come to market at the right time when the demand is sufficient.
But we will continue to execute this hybrid strategy of syndicated channels. Initially and then over time at the right time.
Watch our own service.
Great I think that's it thank you very much for joining and we.
We will speak with you soon.
Ladies and gentlemen. This concludes today's conference call you may now disconnect your lines.
Okay.
Yeah.
Yeah.