Q2 2023 Warner Bros Discovery Inc Earnings Call
Today's conference will begin in approximately two minutes to allow as many participants as possible to join until that time. Your lines will again be placed on music hold we thank you for your patience.
[music].
Ladies and gentlemen, welcome to the Warner Brothers Discovery second quarter, 2023 earnings conference call.
At this time all participants are in a listen only mode.
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 now like to hand, the conference over to Mr. Andrew <unk> Executive Vice President Global Investor strategy, Sir you May now begin.
Okay.
Good morning, and welcome to Warner Brothers discoveries Q2 earnings call with me today is David Zaslav, President and CEO Goodner of Eaton sells our CFO and JB, Perrette, CEO and president global streaming games.
Well, 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.
From 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 important 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 forms 10-Q and form 8-K, a copy of our Q2 earnings release trending schedule, an accompanying slide deck will be available.
Our web site at IR at <unk> Dot com.
And with that I am pleased to turn the call over to David.
Hello, everyone and thank you for joining us.
When we merged the two legacy companies and launched Warner Brothers Discovery 16 months ago we.
We did so with the ambition to be the greatest media and entertainment company in the World.
And we continue to carry out our attack plan in all areas of the business.
When you look back at what we said we would do well.
We're doing it.
We said we were going to re imagine the company for the future.
And focus on free cash flow and de levering the balance sheet.
And we are.
This quarter alone we generated over $1 7 billion in free cash flow.
And we're anticipating about the same in Q3.
This is the result of the hard work of our teams who have been bold decisive and disciplined.
We restructured our businesses for the future to position them to drive both profitability.
And long term growth.
And the results.
There have been significant.
And as a further sign of our confidence in our free cash flow capability.
This morning, we announced a tender for up to $2 7 billion of our short dated debt.
We paid down $1 6 billion in debt in Q2.
Our total debt retirement.
For today's tender to 9 billion since the merger.
And as we've said, we expect to be comfortably below four times levered by the end of the year.
Firmly within the investment grade rating by mid point next year.
And now to our target of two and a half to three times gross leverage by the close of 2024.
With our free cash flow and leverage targets in sight.
We are better positioned to lean into top line growth opportunities across the company.
And that has increasingly been our focus.
Starting with direct to consumer.
We said, we were going to build a strong sustainable direct to consumer strategy.
Focused on profitable growth as opposed to chasing subs at any cost.
And we are in.
In fact, we continue to track way ahead of our own financial projections.
And as we told you last quarter, we expect our U S direct to consumer business to be profitable for the year 2023.
This year.
Year ahead of our prior guidance.
In fact, our global direct to consumer business was roughly breakeven in Q2 and.
And modestly EBITDA positive for the first half of this year.
And our U S direct to consumer business is generating healthy EBITDA, which is helping to offset international losses.
Even with the product development costs and sizeable marketing campaign associated with the launch of Max.
The migration to Max has gone exceedingly well with the overwhelming majority of subscribers in the U S successfully transferred.
While we have seen some expected subscriber disruption.
We've experienced lower than expected churn throughout this process and.
And by all measures and third party metrics the consumer experience is topnotch.
The most important metric at this stage only two months into our launch is the amount of time people are spending watching our content.
And we're seeing early and encouraging signs of stronger engagement.
And theyre not only watching for longer they're also exploring new genres adventure and discovery true crime home improvement and other non fiction content.
The mix of blockbuster originals from HBO.
Together with the nourishment and great personalities found on discovery plus content.
Makes for a very compelling content proposition.
Truly something for everyone.
Preparing to launch Max in markets around the globe over the next year plus.
There were significant opportunity internationally in markets, we have yet to attack.
And importantly.
Platform now has full capability to deliver live programming.
We'll have more to say about that.
While Max will be a cornerstone of our company's growth.
We also see great potential across a number of our other businesses.
One is gaming.
We're the only company among our peers scaled in gaming.
Next up is mortal Kombat won.
The highly anticipated new title in the acclaimed 30 year franchise that for release next month.
This comes on the heels of the success of Hogwarts legacy, which is still the biggest game of 2023.
And Theres more plan, including the launch of Hogwarts legacy on the Nintendo switch in November just in time for the holidays.
Broadly we are positioning our gaming business.
It'd be a much more strategic piece of our IP and consumer engagement puzzle.
We're investing accordingly.
At Warner Brothers Discovery.
We're one of the largest makers and sellers of content in the world.
And its quality content people want to watch we.
We had an industry, leading 181 Emmy nominations.
Including 127 for HBO and Max the most of any network for platform.
As a critical supplier of some of the most highly resin and television series, we are adding incremental asset value to a world class portfolio.
And as we window that content around the globe, we expect to continue to see a tailwind of growth in our production business.
Likewise, we have a real ambition for the future of our motion picture business in the wake of the creative Tour de force and global cultural phenomenon.
That is Barbie.
While the studio's performance has been challenged in recent years.
And they are clearly under earned their potential we are taking meaningful steps with respect to the creative direction of both Warner Brothers Pictures group and DC.
And a key facet of this strategy will be to lean into some of our great.
Under utilized storytelling IP.
It's been 10 years since we made a standalone Superman movie.
Nine years since the last Lord of the Rings feature for example.
For many years the secret to Warner Brothers profitability was tent pole films they'd make two to three of them together with a slate of new original content and that was the winning formula we to believe in the power of 10 pulse featuring great IP recognized by people everywhere in the world.
Our core strengths.
And we intend to get back to doing what we know works.
While we still got lots to do we're very optimistic about the growth potential of this business.
The culmination of what we're doing at both our film and television Studios is further bolstering what is already among the industry's biggest film and television libraries.
And this asset offers a wealth of opportunity in terms of feeding our own platforms as.
As well as others.
The mainstay of our business to create great content and window with through creating value in each window.
And as you would expect a lot of analysis and strategic discussion goes into these decisions and.
In some cases, we'll want to keep premium content exclusively on our platform for a very long time and other cases, we may sell it to third parties and we don't lose anything by growing the pie.
Informing our view on how to best deploy these sports rights here in the U S. A.
A recent venture with B T. In the UK is a great example, having merge BT sport with Eurosport UK.
What is now called TNT sports is available on both linear and streaming and bundled with discovery plus our current streaming entertainment products in that market. We believe there is significant opportunity and the streaming space for sports.
And we look forward to leaning into this incremental growth Avenue.
Underpinning all of the work we are doing is our strong commitment to operating Warner Brothers discovery as one company consider Barbie.
Early this year were created an attack plan for the summer of Barbie in anticipation of the launch of the movie.
Which broke records and is now approaching $1 billion in global box office over.
Over the last six months every area of the company has played a part in promoting this great film.
On the four part series Barbie Dream House Challenge on HGTV.
Which premiered in the U S to 4 million viewers.
And was then broadcast across 146 countries.
The food network's Barbie themed summer baking championships.
Turner Sports sneak peak of the film during the NBA Eastern Conference finals it.
It has truly been a one company efforts.
This is one of the big Differentiators and Super strength of Warner Brothers Discovery.
Or a property or title can benefit from event typing it across our global platforms.
To put the full weight and power of all of our diverse media assets domestically and globally behind it to drive awareness and excitement and.
And the result is truly unmatched.
Of course in light of the cyclical and secular headwinds facing the industry. We are working through some challenges with respect to linear.
The fact is we have a uniquely different hand.
One that we believe makes us more resilient.
On any given night, we reach an average of one third of all cable viewers and it's a great platform for driving our brands and products as we saw with promotions from Max Barbie and sharply our ability to make unscripted content quickly inexpensively and tailored to viewers preferences is also a key differ.
Initiator and.
And we believe this optionality provides us with greater longevity and sustainability at.
At the same time, we've worked really hard on driving efficiency and productivity enhancing our margins recognizing that we need to do that because the overall business is facing secular decline.
That said, it's still generating real meaningful free cash flow that we are able to use the fund growth.
While the linear business as being further challenged by the soft AD sales market.
We do see cause for optimism, we've nearly completed the U S upfront.
And our volume is up.
And our price levels.
Distant with prior year.
A very good result in a tough market.
One more thing before turning it over the border.
Warner Brothers discovery.
We're in the business of storytelling.
Our goal is to tell great stories.
Stories with the power to entertain.
We're at our best inspire.
Which stories that come to life on screens big and small.
And we cannot do any of that.
Without the entirety of the creative community.
The great creative community.
Without the writers directors editors producers actors the whole below the line crew.
Our job is to enable and empower them to do their best work.
We're hopeful that all sides will get back to the negotiating room soon.
<unk> strikes get resolved in a way that the writers and actors feel they are fairly compensated.
And their efforts and contributions are fully valued.
With that I'll turn it over to Gunnar and he'll take you through the specifics of the court corner.
Thank you David and good morning, everyone.
We have been hard at work at W. B D and much of our focus over the past 15 months has been on driving thoughtful efficiencies merger related and otherwise and on implementing a cash flow mindset across the whole company.
Our second quarter results demonstrate the fruits of that labor.
Are disciplined transformation efforts have not only been a key factor in our ability to drive financial outcomes, but they have also made us ever more confident in the strategic vision, we presented early on falling or merger simply put we have begun to conduct our business fundamentally differently and so much of what we.
Identified very early on as an ear and longterm potential we are beginning to realize these are durable performance improvements born out of true change and we see a lot more opportunity.
To that end adjusted EBITDA grew 23% in queue to marketing the second consecutive quarter of meaningful year over year adjusted EBITDA growth.
To date adjusted EBITDA is now up more than $600 million, despite a persistently challenging macroeconomic backdrop.
We have accelerated the delivery of our transformation initiatives, where appropriate and have already delivered more than $2 billion in incremental cost synergies thus far this year.
This has allowed us to offset the impact of the market challenges and grow profits while at the same time funding many foundational investment opportunities.
R. A transformation team is still very much focused on generating new initiatives and based on the successful implementation I am seeing.
And the size of the funnel I am confident that will achieve $4 billion in total synergies much sooner than previously thought and now see a clear path to achieving $5 billion or more through 2024 and beyond.
Our second quarter free cash flow of over $1.7 billion is strong proof of these efforts clearly it was a healthy number of nicely ahead of our expectations.
I am incredibly proud of this result.
Not only because it allows us to continue to quickly delever, but perhaps more importantly, I'm excited because this outperformance is coming through across a number of components of our cash flow statement and I view this as true cash focus becoming evident across the company.
Key factors of the outperformance, where a number one slightly better than expected adjusted EBITDA.
Number two improvements across virtually all elements of our working capital and other below the line items.
Part of a very long runway of opportunity that we are beginning to chip away at <unk>.
Number three the closing up the gap between content cash spent an amortization, partly due to shifts and the timing of productions and partly as a result of implementing our new content strategy initiated last year number four modest cash savings from the impact of the WG and Sag Aftra strikes, which we estimate whereas the low.
100 million dollar range during the quarter.
We also absorb $200 million of cash restructuring and integration related expense during the quarter in line with our expectations.
We repaid over $1.6 billion of that 1.1 billion of the term loan and over $500 million of notes.
As you saw we launched a tender offer this morning for up to $2.7 billion of notes that a maturing through the first half of 2024.
Our net leverage came down significantly this quarter and is now at $4 six times consistent with our capital allocation policy. We remained focused on debt pay down and have a clear path to net leverage nicely below four times at the end of the year and reiterate our expectation to achieve target leverage of two and a half to three times gross.
By the end of 2024.
Turning now briefly to the segments, which I will discuss as always on a constant currency basis, starting with DDC I'm very encouraged with the results at effectively breakeven EBITDA quite a bit better than we expected notwithstanding the significant investments in the development and marketing of our new Max platform in the U S.
Q2 nicely demonstrates the underlying traction and efficiency from the integration of legacy DDC operations and organization.
I do want to call out why we saw growth across all three revenue streams content was the standout helped by the timing of licensing deals.
And while selling content to third parties has been and will be a core element of our company wide operating model, we would expect some smoothing out of content licensing in the second half of the year.
We saw a sequential net subscriber loss of $1.8 million and Q2 is expected trends were impacted by overlapping subscriber basis between Max and discovery plus <unk>.
Expect to turn from the end of some key 10 pulse series such as the last of us in succession.
And wholesale declines, including the unwinding of some very low <unk> international wholesale distribution deals that were struck under the prior strategy that prioritized subscribers over our profitability and value.
And with respect to the overlapping subscriber base, we did see several hundred thousand subs turn off during the quarter meaningfully less than we had anticipated.
Why do we do expect to see some more elevated turn on discovery plus.
We also see engagement patterns consistent with what we saw prior to Max launch, making us optimistic that our strategy to keep offering. These two products was the right one for customers and for our business.
Our streaming team really did an outstanding job with this transition.
We continue to see traction on the streaming advertising opportunity supported by gains in at night subscribers early initiatives on H B O Max originals and increased engagement.
While the overall advertising market remains soft we see the streaming of advertising opportunity well positioned to benefit from secular tailwinds over the long term.
This is particularly true against the backdrop of the enormous value of some of our iconic shows for advertisers who in the past have no access to this inventory.
He remained focused on further scaling the segment of our offering and.
The relaunch of Max will certainly be a driver both here in the U S and later abroad.
I am proud of the meaningful strides we made in the first half of the year and C. D to see as an important contributor total company profit growth year over year in the second half.
Turning to studios the studios performance has clearly been inconsistent or.
Box office results in Q2, underperformed, our expectations, which weighed on financial results and as ironic because I'd have to say that given how incredibly successful Barbie has been impacted Q3 of course Q too.
Packing dissipate overall content revenues declined 25% to two number one the slate as I mentioned as well as the timing of production of certain television series and fewer CW series orders following the next star transaction.
Number two lower internal sales to networks, and DDC and part resulting from the more disciplined content investment in programming approach, we've implemented such as exiting direct to Max movies or certain scripted series on linear for which we felt ratings did not justify the investment.
Please note. These lower revenues are upset and lower eliminations on the group level, but impact a segment level of revenue.
And number three finally and gaming the Lego Star Wars game was released in the second quarter last year, which created a tough come for this year.
Looking ahead for naturally delighted with the performance of Barbie, that's far which is now approaching $1 billion in global box office and we're excited about its prospects.
Mainly monetization windows.
For the remainder of our feature films this year as well as Warner Brothers television productions release dates and performance expectations are naturally fluid given the ongoing strikes and we will evaluate our options and update the market accordingly, but as it is possible, we will see greater variability against our forecast turning to networks advertising decreased 13 per.
<unk> as we called out last quarter, we faced tough comparisons as we did not have the NCAA final four and championship games. This year and although we did have the Stanley Cup finals for the first time the net impact of these two sporting events wasn't approximately 200 basis point headwind ajar.
Justin for this we did see underlying sequential improvement.
I would characterize the broader tone of the marketplace. Thus far in Q3 is similar to that of Q2, certainly here in the U S. While international markets are broadly touched stronger.
Said as David mentioned earlier, we are making strong progress on our upfront deals he call outs from my perspective, our number one linear volume expected to be up with pricing on balanced pretty consistent with the prior year.
Number two DDC volume is up more than 50% in the marketplace in which cpm's were positioned to drive scale for us as much as for the broader market.
While visibility overall remains limited and the scatter market inconsistent. We expect continued modest sequential improvement through the end of the year and forecast global networks advertising revenues will decrease in the high single digit range. During the second half of the year with Q4 sequentially better than Q3, which is overall meaningfully worse.
And our forecast from earlier in the year.
[noise] distribution revenues decreased 1%, a modest improvement versus last quarter as we continue to be pleased with the pricing and peering of our networks and renewals representative of their importance to both traditional and virtual bundles.
Before wrapping up the segment discussion I'd like to offer an update on the AT&T sports nets.
I'm very pleased to say that we have been working diligently with the respective leagues teams to formulate a plan to exit <unk> business in a manner that minimises the disruption to teams and their fans.
We expect each of the networks will be sold or operation seized by the end of the year.
While we physician fees to operate it adjusted EBITDA breakeven this business generated nearly $400 million of revenues in 2022 and skewed heavily towards distribution revenues.
These networks are sold or wound down over the next few months, we expect a modest impact to Q3 distribution and advertising revenues with a more meaningful impact in Q4 and into 2024.
Turning to guidance and our outlook for the year, let me start with our most important financial metric free cash flow.
Four Q3, I expect us to again generate free cash flow into $1.7 billion ballpark, reflecting similar underlying trends as in Q2 with sequentially large our savings from the strikes as.
As well as the success of Barbie, notwithstanding the roughly $900 million a semi annual interest payments.
And based on this outlook the health of the underlying free cash flow drivers and further opportunities in the pipeline icy full year free cash flow in the range of four and a half to $5 billion.
This also assumes cash restructuring and integration related costs for this year of roughly $1.2 billion, which is a couple of hundred million dollars more than our prior expectations.
For adjusted EBITDA I am now assuming will settle towards the low end of our target range of $11 billion to $11.5 billion.
The key drivers for the final outcome will be centered around at sales due to see profit growth and contributions from the studio segment.
Let me provide some puts in pigs.
First the timing and magnitude of a potential AD market recovering continued to be the most important driver of upside and downside to our results.
Second the DDC segment has been a driver of our year over year EBITDA improvement and we expect that to continue helped by efficiency gains in top line benefits.
We see segment EBITDA losses of no more than a couple of hundred million dollars for the full year of 2023.
Third.
Certainly in the studio segment has increased with the dual strikes.
This may have implications for the timing and performance of the remainder of the film same as well as our ability to produce and deliver content and while we are hoping for a fast resolution are modeling assumes a return to work date in early September drove.
Drove the strikes run through the end of the year I would expect several hundred million dollars of incremental upside to our free cash flow guidance and some incremental downside for adjusted EBITDA.
When I take a step back notwithstanding the factors influencing the broader landscape I am more and more convinced that the dedicated work of the leadership team and efforts throughout the company marked by a meaningful shift in mindset about how to manage this company is starting to pay dividends I believe our financial results this quarter speaking of <unk>.
Walliams about this change.
I am very confident in the trajectory of R&D levering in debt pay down the benefits of which will increasingly allow us to turn our dedication and focus to support further growth initiatives to ensure long term sustainable and profitable growth ahead with that I'd like to turn the call back to the operator and take your questions.
Thank you if you have a question. Please press one on your telephone keypad tourists trying a question simply pass that one again one moment. Please for your first question.
Your first question comes from the line C J Jan with Everclear ISI. Your line is open.
Good morning, this is customer morale on for Vijay Thanks for taking the questions one on M&A and one on the synergies first time M&A based on commentary from your peers. It seems like there might be a willingness from some to reshape the media landscape and that certain linear or maybe even screaming assets.
Swap hands from your end it seems like there's a lot of comfort and getting to your leverage targets. The cinergy capture capturing machine is firing on all cylinders free cash flow should ramp going forward and of course, the second anniversary of the emergence close if not too far away. So can you talk a bit about your latest views on M&A and what's your appetite from a strategic.
Or financial lens.
Synergies <unk> can you expand on your comments earlier, a bit and help us understand where this increased to 5 billion is coming from and how should we think about the timing flow through in 2023 and 2024 should we expect this 1 billion upside will mostly be reinvested in business.
There are any changes to the total cash cost to achieve that we should be mindful of as we think of free cash flow over the coming years. Thank you.
Thanks, Let me just start by saying.
[laughter] team is really work towards the last 16 months.
To restructure this business for the future to build a business that is a real storytelling company, where we can continue to invest are meaningful free cash flow.
To serve all of our diverse businesses. So the delevering that we're doing now which is which is really accelerated and is accelerating is it is is a key element of making this turn and we've already started to focus on each of our businesses now for growth.
We liked the businesses that we have we have a diverse set of assets global reach great 10, Paul's that have been under used that we could now get into whether it's Harry Potter or Lord of the rings.
But the whole D. C plan for the next 10 years and so we feel very good about our hand, and our focus now will be finished the delevering, which we've made the turn on now and is clearly in sight.
Focus on our own growth, which which we think we did the same attention too and the same rigour.
Yeah.
On synergies.
The headline here is as David has said so many times, we have completely changed the way we are running a business that this is not about synergies that is not about immigration. It's just a fundamental shift in mindset that continues to come through and again. The you saw the free cash flow number in the second quarter I'm, just amazed by the results and it's coming through.
Everywhere and there as I said, there was a small strike impact here, but without the strike it would've been a $1.6 billion number instead of a $1.7 billion number and I'm I'm pointing this out because it's not one or two things that stick out here, it's it's cash coming in everywhere across.
Across the P&L and then below the line and so as I said a minute ago. We've we've achieved the $2 billion of incremental value capture with our transformation initiative.
Do see $5 billion or more.
And again as we've said before a lot of that is going to hit in 24 and beyond we still we're still in the early innings of many of our systems transformations pointed this out before were rationalizing 260.
Systems across the company. So all of that is is still in the pipeline through your point, whereas this coming from it's the same point.
Point that I've made in the past, it's really just looking at what's in the system that we have a very significant cushion in terms of the overall savings amount tied to all the initiatives that the company is going on and I'm just looking at how those are flowing through the implementation milestones I have full confidence now that we're going to get.
$5 billion or more and.
We'll continue again this is not a an integration exercises a transformation of the entire operating model for the for the company and yes, we're going to be reinvesting. Some we actually have reinvested. Some if you look at the numbers I said 2 billion have flown through in the first half of the year. We've obviously not grown profits by 2 billion use some of that to offset that.
The tougher macro environment and we've used some of it to fund the investments everywhere in the company.
That's great. Thank you both.
You know our next question comes from the line of Kennon and catches fire with Barclays. Your line is open.
Hi, Thanks.
Maybe one question on tree Castle.
Casual numbers that obviously very impressive for the quarter as well as the guidance for Q through Q3 <unk>.
Could you help us understand the working capital Tailwinds I mean, the sources of those and we've done.
As you look beyond this year.
<unk> can you keep harvesting the cash flow.
And as you get the next year.
You, obviously have the gas cost.
Going down.
The creation and then you have interests corkwing down.
But then you have offset potentially in the form of.
Advertising or programming costs going up and BBC getting back to grow up so could you talk about those tradeoffs as you look beyond this year.
In terms of free cash flow growth drivers.
And what date would look like in 2004.
So let me start with the with with the source of the night quickly went through them in my prepared remarks earlier, but again the most important point is it's coming in across the entire cash.
Cash flow statement, then and cannot we have talked about this in the past cash was never an objective.
And three quarters of this company.
So when we went in and looked at the enormous amount of uncollected receivables the the enormous delays and even sending out invoices.
The willingness to just pay our suppliers before even payments are due.
It was just never.
A.
Focus area.
The discussion of.
A 10% margin business or project is that a good project could be but it could be bad project. If it takes three or four years to get the cash and after you deploy the capital. So those are all factors in.
That are reflective of a mindset shift across the company and importantly, I do also want to point out because sometimes got the question on the securitization facility. We've said a number of times, we're not intending to make that a major driver free cash flow. It hasnt benefactor this quarter.
Or a year to date and again, we're not expecting this to be a major driver might fluctuate on the quarter by quarter basis, but it's it's not included in a positive or negative way in any of our guidance and so looking beyond 2023 into the future.
You are asking the question how is this going to develop from here I do think that we have multiple bites at the Apple ahead still from a from a working capital perspective, we're really just getting started and we're really still working with an incomplete instrumentation from a systems perspective.
So there is there is a lot more for us to do you have also gone through a number of the the underlying positive drivers here cost to achieve.
Is going to come down and Cook and I realized I forgot to answer your questions. So we had guided through.
$121.5 billion in cost to achieve we're going to be as we said before probably closer to the upper end of it but 1.2 billion of that has been a flow through this year and then it's gonna come down over time interest is going to come is going to come down.
And Capex is gonna come down we have a slightly elevated capex level is part of our transformation.
Focus here, putting new systems in place supporting Jb's development, the Max platform et cetera, So that's going to be a positive driver as well and then we will see.
How we do on the P&L again, we've put ourselves in position too.
To really get behind you all three of our businesses and we'll we'll update you as we as we get closer to 2024, but.
There's definitely enormous opportunity and I do not view this as sort of.
A one time bump we're changing the way we are operating the company and we're changing the cash generation profile of this company by the way fully in line with what we've always said longer term, we should be operating at a 60% cash conversion rate.
Thank you.
You know our next question comes from the line of Brett salesman with Goldman Sachs. Your line is open.
And thanks for taking the question and thanks for somebody to help in terms of how to think about TTC segment EBITDA. As we move ahead I was hoping you could spend a little time talking about how we should be thinking about revenue in that segment in particular, he puts and takes around the net add volumes as you sort of moved past the U S launch and start to move in.
International market and I'd also be curious for your updated thoughts on the balance between driving growth to pricing and <unk> versus focusing on volume. Thanks.
Okay, well, let me start maybe and then pass the J B.
As I laid out a minute ago I do think that advertising for our due to see platform is a massive opportunity I mean, you see that we're rolling advertising, 25% in the quarter.
On the platform and that is in a in a in a challenging market environment and in fairness, we haven't really.
Prioritizing this and as I laid out for the first time ever advertisers are going to have access to some of the best shows in in the entire landscape and we're opening that up we've got the <unk>.
Technology in place and it's definitely going to be a growth priority, especially since we know that and and in many cases, we can generate higher <unk> on the AD light platform or offering that in on the on the free.
At free subscribers.
I mean, I think that to add to <unk> comments I think we look at it as multiple lovers as we go into 2024.
The add just picking up where gruner left off the AD opportunity. We're just starting in the upfront it was a huge driver.
Of our of our success in the upfront and so that will start to kick in further with just started in February as you know with putting advertising units in our most highly valued most premium content in terms of the H B O and some of the legacy.
<unk> Library series.
And so that we see advertising as a driver we see <unk> as a driver we've risen.
Pump prices up.
Internationally and in the U S over the course of the last nine months and almost every market. We have launched the ultimate tier, which we've seen very healthy picked up here in the U S. Which is also incremental are approved for us. So that's an opportunity I think engagement as David mentioned in his prepared remarks, we've seen very positive initial trends on greater.
Gage meant which is a precursor and a leading indicator to future churn, which is obviously something that is probably number one on our bullseye of things, we're trying to attack and lower which.
Which will help us and then obviously on the net add sign as we rolled out internationally and as we get the platform rolled out and as we learned to even more content offerings.
As David alluded to potentially in the life space.
We think there's incremental opportunity to drive subscribers and more importantly revenue growth.
Thank you.
Your next question comes from the line of John <unk> with you B S. Your line is open.
Great. Thanks.
Some press reports suggest that ESPN is gonna go direct in 2025, I think it's the first time, we have a potential sort of date for that I mean.
Do you see that as a sort of meaningful change in the in the T V landscape.
And then as it relates to your own sports sports portfolio, you talked about TNT in Europe , I mean, any update on the timing of Adams sports and news to your to your screaming offering.
Whether it's a timing or they're sort of message of what you would do it I mean.
Horsey, It just being sold it in with the match offering could you potentially here sort of a separate offering that can be bundled with the current backs offering. Thanks.
Thanks, John .
First.
When it comes to our sports rights domestically and globally taken as a whole where money. Good. So we have good deals.
Here in the U S and around the world.
That that are that provide real value to us one of the elements of those deals that we own the digital rights too.
To our sports so.
So we have the ability for no incremental cost to put that content on our platforms.
And we're doing it in Europe were doing it in different ways in some cases, we are doing it as it is in.
As an incremental tier.
And in some cases, we're putting it on the entire platform and we've been at it now for about a year and a half or two years and.
It's it's pretty compelling.
Talked about news and sports as artillery and a real a real opportunity for us so will be coming to you guys. Soon.
We've been working this summer very hard number one we want them to get this platform right. We wanted to do no harm, let's get a transition there was a fair amount of overlap and we got the transition. The platform is working exceptionally well consumers are very happy engagement is up.
One of our theses of of having.
How well this overall mix of content will work <unk>.
Directionally is very.
It looks like it's working more than 20 per cent of the of the viewership is going to some of the more diverse content and different time periods.
Still have a lot of work to do early on.
But news and sports are important the differentiators, they're compelling and they they make these platforms come alive and that's.
<unk>, if you're on an S V O D platform and something is going on in the world.
And you could see it.
It has that platform makes that platform really alive. So you will hear from us on that.
So.
Great and the ESPN direct something.
You know I think how everybody determines we're focused on how we're gonna use our sports domestically and globally.
To create more shareholder value and stronger economics and helped the leagues, who all are very interested in reaching more people more demographics and so that's our focus.
And in addition, as you know we have a bleacher.
Which is the the the.
And and house of highlights, which which is R. A huge funnel for us and a big opportunity and what we're focused on how we use that in tandem because it is the largest platform for people under 30 in sports.
Okay. Okay.
Yeah. Our next question comes from the line Jessica Reef with Bank of America. Your line is open.
Just on film maybe just it goes a little deeper.
Bobby was health outstanding so the lessons learned from having original IP and.
Brilliant marketing how does this shape your film strategy going forward can you talk about the impact to Max one hit.
Hit film hits the platform.
And then I guess.
Kind of a studio segment.
You talk about selling to third parties.
Which.
Obviously makes a lot of sense have you seen any change in demand given the strikes.
Or can you just talk about overall denounce for.
For your content.
Well thanks Jessica.
Barbie Barbie.
Really important for us because.
Which we think one of the big unlocks a value is running this is one company. So we started having each of the businesses. We meet together every week and all the creative who you meet together every week, we first got behind house of the Dragon and we had the dragons going across across the bottom of all 30 channels and across the baseball field in the playoffs.
And having our analysts we got them the content in advance and they talk about it. We then did the last of US This idea of Super sizing by going using the fact that we reach 30 or 40% of America on a on a given night.
That each of our all of our platforms globally.
Can have an impact and we saw it with the last of US. We then brought the entire company together.
On Hogwarts legacy and Super sized it we don't we we're not doing it for everything we're trying to figure out what are the strategic assets.
And then we did it on Max.
And we're getting better at it with just getting started.
This is such a diverse set of amazing assets that how do we use them to help each other and how do we use them also.
We don't have to go out and spend money and when we already have huge marketing platforms that we could use on our own and using some of you know, having Berkeley and shaq talk about something that they already love could <unk> is is often more powerful than running a commercial and so it's important for the confidence and the culture of the company.
<unk>, Yeah, we can get behind these assets in a unique way, we're a very unusual company with the assets that we have and it starts to build our muscle memory and the idea that this can work.
This idea of a Barbie summer and then every week what is everyone around the table gonna do.
And the cakes were pink on food network, we turned the fields pink across Europe and.
Of course, it started with an amazing movie by Greta and and Margo going around the world. So it starts with great content, obviously, but this but the fact that we can super size. It uniquely globally is a big deal.
For Us I think it will we can <unk>, we really believe in the motion picture window.
Let this movie go to the motion picture window play it up build up that brand then haven't go into <unk>.
Get through these windows of economics that I've worked forever, and we think work extremely well and then.
Put it on Max and when it goes on Max We think it will have a very good impact and that will be in the fall <unk>. Yeah. I mean, Jessica as you know films, obviously in movies continue to be a very important part of the Max offering actually remind people get in the U S. Obviously, we're particularly more reliant on the Warner slate outside of the U S. We are a multi studio service still.
Including the Warner slate of films are.
Incredibly important and I will say, what we've seen so far is.
Obviously, we sort of benefit on Max and both ways, even content, even the titles that don't necessarily perform as well as we wanted to them in the box office by the time, they get to Max because fewer people have seen them and they are newer to more people, they do well and the bigger titles.
Like we had in Batman last year or doing when it came to the service and we expect the same of Barbie that do incredibly well people want a receipt and so it continues to be incredibly important part of the of the small business.
The key for US is as we as we have accelerated the Delevering now and made the turn that we focus on growth.
And focus on growth will be we now have command and control for each of each of our businesses and we're going to give the same rigour and focus on how do we drive growth across each of our businesses and one of those key initiatives is one company, we could do that how do we how do we use this the unique set of assets that we have that no one else has.
Globally.
To drive growth and.
That's that's what we're continuing with starting much more on to focus on growth and you'll see it and we'll be talking more about it.
So the content licensing.
We have we have one of the what are the best television and motion picture libraries in the world.
If you look at our overall the overall economics I think we're we're actually below the last couple of years in terms of what we're selling.
If if the strike continues there may be more demand, we're always looking to maximize we're hoping this strike gets settled as soon as possible. It's important it's important that we get going that we get back to work doing doing what we love and we're hoping that both of these strikes get resolved soon that's our focus.
Thank you.
Your next question comes from the line have been Swinburne with Morgan Stanley . Your line is open.
Okay.
Thanks, Good morning.
David you've been through lots and lots of cycles advertising cycles, and particularly in your career and I'm wondering.
How you would describe bold banner.
[laughter] experienced [laughter].
I guess I guess the question is I think about your Jack Welch story from all.
All these years talking about ratings going down in advertising going up and whether there is any concern in your mind that we may be plenty or T. V has reached that point in the corollary would be with Max It would seem like you have a great opportunity to sort of move some of that linear money over to the the city and I'm wondering if you're optimistic that you can kind of capture that.
141, so it's sort of a bigger picture of advertising question, but would love to hear your thoughts.
I spent.
The market is.
Uhm.
It improved a little bit last quarter, and we think it.
It feels like it's improving a little bit this quarter, we're seeing some more improvement not not anything great, but we're seeing some more meaningful improvement outside the U S. But this is unusual.
35 years.
Think a lot of us expected that there would be a meeting that we'd see a meaningful recovery in the second half of the year and we haven't seen it and we'd need to we've needed to figure out how to make up for that.
We just came out of an upfront that is encouraging at least for US we're seeing mid single increase on the sports side.
We we got price increases with some of our affinity networks. Some of these networks are really important to advertisers and we were still doing a lot of original content, which makes us unique and some of our smaller networks were slightly down Max was the star.
A big Star as Jamie said.
Some of this content.
The greatness of of of H B O Max the Kacey all that content that we have 127.
Nominations the idea that you can get in front of succession that you can you can.
Get in front of the the highest quality content for the first time and it is very uncluttered, it's one spot right for now on the front end of it and some of the older content.
Is is limited.
And so we're seeing really good pricing.
We can't say one for one we need to build up Max for now it's it's.
There's a there's a huge.
Demand for it we're going to be pushing for as we look at growth everywhere, we're going to be pushing now for how we reduced chern and and grow Max Uhm, but it is very helpful to us that we have a significant digital footprint, we have a really strong.
Product and Max.
And look for US we can't predict what's gonna go on with the linear business, but we have a lot of command and control as I talked about earlier.
And.
The viewership on our platforms are actually quite strong it's just that they are older.
And there's there's there's a load of people still loving and watching our content and most of our content now is going over to match, so they're watching diners and dives and then we're getting monetizing it again.
Oh to to all of our subscribers on our ads here and around the world. So.
We have that symmetry.
We need to build up the other side, but we've been very aggressive and we will continue to be about driving the margin and and we're aware that there is a decline.
In the traditional business and we're fighting to keep that free cash flow and we'll pull every level we can.
Thank you David.
Your next question comes from the line of Michael Morris with Guggenheim. Your line is open.
[noise]. Thank you guys [noise] excuse me good morning, Uhm I want to ask one about the strikes and one about the international business.
First on the strikes David.
From the outside it does feel like the two sides are.
Very far apart and so I I'd love to hear if you could characterize.
How far apart you feel that the sides are recognizing that you are being negotiated on behalf of but.
Your interests are obviously very much at stake here. So I would love to hear your thoughts on how far apart the sides are and how influential you feel like you can be on on bringing sides together.
And then the second on the international business.
You a constructive comments about the opportunity there obviously your international business is a pretty big next of brands that partnerships licensing arrangements. So could you maybe talk about <unk>.
Strategic vision here is your ambition to have one strong single brand overtime similar to the way it Netflix restructured and maybe more tactically what are some of the milestones or initiatives over the next 12 months that you are looking to achieve thanks guys.
Thanks, So much will look on the strike.
I'm very focused on it because this is our business. This is all we do.
And get it and it's critically important that the.
Everybody the writers and directors the actors producers.
<unk> all the below the line cruise.
And.
Everyone needs to be fairly compensated and they need to feel valued and feel that they are fairly compensated. This in order to do their best work and that we have to focus on getting that done.
Hopeful that it's gonna happen soon I'm going to.
I think all of US in this business are are are very keen to figure out a.
A solution is.
Quickly as possible we are in some uncharted waters in terms of <unk> of the world as it is today and measuring at all and so I think in good faith.
We all got to fight to get to get this resolved and it needs to be resolved in a way that the the creative community.
<unk> fairly compensated and fully valued.
And then Michael as it relates to international certainly on the streaming side, we will be moving to one unified consistent Brian with a bunch of Max over the next 12 months with a rollout plan for Latam EMEA and then APAC.
So absolutely over the course of the next 12 months. That's that's the roadmap and the plan were on I think the second pieces. We obviously excited as we think about content mix, particularly in an environment where to David point about the strike.
We do have great original productions happening outside the U S as well both for Max as a platform as well as our local networks and that content will feed Max as well.
And so this mix of powerful global IP in global content coming largely out of the U S as well as local content produced by our local teams and market <unk>.
Particularly in Europe , and Latam that mix to drive penetration of Max outside of the U S. We think is very powerful and then on top of that we have obviously, David alluded to earlier, our sports and as we think about Europe in particular with the Olympics in coming home to Europe next summer.
Summer will be a great launch platform for us in an email.
Next question.
Yeah. Our final question comes from the line <unk> J P. Morgan Your line is open.
Hi, guys. Thanks for squeezing me in.
Grab some barbie I'm excited for Shaq and Charles to discuss some Barbie Superman chemo that'll be great.
Following up two things following up on Jon's question. It sounds like any challenge coming to Max and we should think about Max is the path for more of your.
Turner sports over time, how does that impact the Max pricing can you put those sports on and keep prices around this level or do you think we need a substantial increase to get there.
And then second on lower DTC churn the quarter was that driven by I think you mentioned.
What's the remaining discovery H B O overlap.
That's sort of latent chern and what do you see in the pace of that consolidation going forward.
But we we think it's a real asset.
All the sports rights that we have.
We will we have a real strategic plan that we're finalizing and we'll we'll take it to you guys and be very clear about exactly how we're going to use a news and sports in on our platforms in four to build value for the future in the near term.
Yeah, I mean, I think it's David alluded to earlier and sports we have a mix of models today across largely in Europe . It is priced.
In a incrementally priced tier.
And last time, we have some sports bundle.
A mix there as well we have some local football soccer in a separately priced here, we have champions League in Mexico, and Brazil priced within the entertainment offering I think generally our view is sports as a such a premium offering with a very focused and passionate fanbase that generally the model.
Some way to find increment need define incremental value.
To get out of it and so exactly how that.
It comes to market, we will have more to say later in the year, but generally our view is that it needs to be monetize incrementally, let's put it that way and then as it relates to the overlap I think as we said publicly before we had about four we estimate about $4 million global overlap.
Having subscribers between the plus an H B O Max at the time with a a large portion of that in the U S.
And gunners remarks, you talk to the fact that we've now seen several hundred thousands come out of that in the U S and we.
We will continue to presumably to see some further tailing off of that overlapping sub base, but it has been materially less than we expected and so that's the that's the story on the overlap.
Can I follow up quickly on the on the Mac side do you think that CNN would also require incremental value or do you think that can be integrated.
Regular <unk>.
We'll be back to you soon on that one of the things you are also seeing with us as we're winding out a very there was some low or poo deals that were internationally that we just looked at and we just said that's not who we are.
Let's get out of those deals and so.
There has been a focus to say, let's focus on profitability let's.
Let's focus on really good subs.
The ability to nourish our audience and build on that those economics, that's our future and let's get out of these deals that were bargain basement, and providing very little <unk> value.
Since this concludes the question and answer.
As well as today's conference call. Thank you all for joining you may now disconnect your lines.
[noise].