Q3 2023 Warner Bros Discovery Inc Earnings Call
Ladies and gentlemen, welcome to the Warner Brothers Discovery third 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.
Please be advised that today's conference call is being recorded I would now like to hand, the conference over to Mr. Andrew Slaven Executive Vice President Global Investor strategy, Sir you may begin.
Okay.
Good morning, and welcome to Warner Brothers discoveries Q3 earnings call with me today is David Zaslav, President and CEO Gunnar of Eaton's, though our CFO and JB Perrette, CEO and president global streaming and 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.
<unk> 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.
For additional information on important factors that could affect these expectations. Please see the company's filings with the U S Securities and 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.
A copy of our Q3 earnings release trending schedule, an accompanying slide deck will be available on our website at IR at <unk> Dot com.
And with that I'm pleased to turn the call over to David.
Hello, everyone and thank you for joining us.
Let me start by saying that we are hopeful we will reach a resolution to the Sag after strike soon.
We made our last and final offer with traumatic virtually all of the unions goals and includes the highest wage increase in 40 years.
And believe it provides for a positive outcome for all involved.
We recognize that we need a creative partners to feel valued and rewarded.
We look forward to both sides getting back to the business of telling great stories.
As the strikes underscored these are challenging times.
Industry is facing accelerated disruption and a rapidly changing marketplace.
To succeed long term, we must be flexible and adaptable.
And have a strong arsenal of assets that will enable us to maintain momentum amidst ever evolving consumer behavior.
And at Warner Brothers Discovery.
We are and we do.
Over the last 19 months, we have been relentlessly focused on reinventing This company.
Repositioning it as a more stable.
Sufficient free cash flow generating business.
Well, we are and always will be a work in progress and while we are thoughtfully navigating industry wide challenges like a strained advertising market.
Our teams continue to execute on our strategy.
More broadly we generated over $2 billion in free cash flow in Q3 and.
And are on track to meaningfully exceed $5 billion for the year.
This has made it possible for us to aggressively pay down our debt.
Which we've reduced by nearly $12 billion since launching the company last year.
As we've said by the end of the fourth quarter, we will be meaningfully below four times net levered.
While paying down debt and Delevering will remain a top priority for us.
We're also now in a position to allocate more capital towards growth opportunities.
Our asset mix one of the most complete and diversified in the industry positions us as well as any to drive long term value.
We possess the full slate of production and distribution capabilities as one of the preeminent makers and sellers of content in the world.
And as you know we are home to many of the most iconic brands and franchises in the history of entertainment.
Of course, we believe the real power lies not just in the storytelling IP brands and franchises.
Formidable as they are.
But in the opportunities we create as one company to maximize their impact reach and ultimately their value.
As I said previously a lot of our most popular IP.
Has been under used.
There are great new stories waiting to be told in exciting new ways to bring those stories and characters to life.
Cross screens consumer products experiences and more.
We recognize that we can do a better job of managing and maximizing the value of our blue chip franchises.
Like game of Thrones.
Harry Potter and Superman.
Each represents an ecosystem of storytelling possibilities and.
And we intend to capitalize on their potential with a more focused franchise management approach and look forward to bringing in a new global head of franchise as we discussed two weeks ago.
This person will work closely with the leaders of our businesses to identify opportunities to expand the reach and impact our storytelling IP across the full range of consumer touch points more on this soon.
One of the big advantages, we have at Warner Brothers Discovery.
Is that we own and control all of our content and storytelling IP.
And that allows us to distribute it in ways that maximize reach and profitability.
Of course, the top priority for US is our streaming service Max.
We continue to be very pleased with the strong foundation that.
<unk> and the team have put in place to first stabilize.
And now grow the business.
In Q3, we generated another quarter of positive EBITDA behind both distribution and advertising revenue growth.
And we recently layered in live programming underpinning, our broad content offering that appeals to a wider spectrum of consumers.
And is showing increased engagement and lower churn.
And while the third quarter subscriber numbers were impacted by one of our lightest original content schedules in years in part due to the strike constraints that compelled us to delay some releases.
As well as a further decline in the overlapping discovery plus subscriber base, which we expected and discussed with you.
We are very excited about a more robust content slate as we head into the strong 2024 and beyond.
We've got a fantastic lineup plan, including.
The new season of true Detective Knight country, with Oscar winner, Jodie Foster, which will premiere on January 14th.
In the spring by the New limited series the regime, starring Oscar winner Kate Winslet.
Later in the year, we will see the sympathizer and espionage thriller based on the Pulitzer Prize winning book by the same name and produced and co starring Robert Downey Junior debt.
The franchise, a half hour comedy about superhero movie, making created by Armando Iannucci and Sam Mendes.
The Penguin our limited series based on the DC Comics character set in the Mac leaves Batverse and starring Colin Farrell.
And we're also looking forward to new seasons of award winning series such as house of the Dragon and curb your enthusiasm.
To name a few.
And in 2025 will a brand new seasons of the last of Us Euphoria White Lotus and more.
We're confident this great new content will further fuel Max is popularity, both domestically and around the World Cup.
Coupled with our new live programming it really does provide an exceptional offering for consumers.
In October we launched C N N Max <unk>.
$24 seven streaming offering with live news analysis and original programming from the most recognizable news brand in the world and.
And while CNN has a strong linear asset. We also appreciate there's a segment of the population, mostly young people, who don't subscribe to cable.
And this new streaming product appeals to them as well.
As evidenced by CNN Max viewers being nearly 20 years younger than traditional linear viewers and the vast majority of our CNN Max viewers being non pay TV subs.
We are analyzing everything we're learning in these early stages, and we will continue to iterate and improve the offering.
The key takeaway here is that we saw an opportunity and we were able to pivot quickly seamlessly and decisively.
And by providing CNN Max on the service, we're expanding our audience.
And our impact.
The fact is what CNN does there has never been more important.
Or more impactful.
And no one does it better.
In my view, we have the very best journalists in the business right.
Right now we have over 70 people on the ground across Israel, Gaza, The West Bank and Lebanon.
And we've also got teams in Ukraine.
They are in harm's way.
Working around the clock.
Porting on these conflicts.
And our teams bring not only their news reporting skills, what their deep knowledge of the regions. The geopolitical actors in the complex to bear in a way that really benefits the audience.
If you go to the White house, the Pentagon The State Department Congress Embassy row CNN is on <unk>.
And homes across the U S.
And everywhere across the globe.
Our new chairman and CEO of CNN worldwide Mark Thompson.
In the seat now.
He's visited nearly all of the offices.
<unk> already spent considerable time with leaders and employees.
We couldnt be more thrilled to have mark at the helm.
N N is coming off a strong month in October with our new primetime programming lineup off to a very strong start.
And audience levels for the U S network up double digits year over year in key demos, while also outpacing the competition on both linear and digital platforms, where CNN remains the number one digital news outlet in the world. We're excited to build on this momentum.
We also launched sports on Max last month with the Bleacher report add on sports tier, which will include over 300 live sporting events annually, starting with the major League baseball post season games, which were incredible and now NHL and NBA through the playoffs as well as NCAA March madness.
This U S soccer and more.
The huge advantage for us to have live sports and news.
Together with our bouquet of scripted entertainment non fiction and one of the best TV and motion picture libraries in the world.
Not only does this make for an even better offering for consumers as evidenced by the millions of subscribers, who have enjoyed our sports and news offering in only the first few weeks.
But it is also helping the <unk>, which is the most strongly correlated influence on churn.
Similar to news sports is bringing in an incremental and younger audience with Max viewers on average 12 years younger and traditional linear.
We will be launching Max in Latin America in the first quarter of 2024, followed by the Nordics, Iberia, Netherlands, and central and Eastern Europe, starting in the spring.
The service will launch in France, and Belgium in 2024 as well.
First entirely new markets.
And in markets, where Max will not yet be available.
Discovery, plus and Max will be the only place where fans can get every minute of the Olympics in Paris next summer lots.
Lots to look forward to.
I also want to remind people that Max and HBO Max are still only available in markets that reached 45% of the world's broadband households.
Even excluding China, Russia, and India, and while we will stay financially disciplined in our decision, making we have significantly more growth to come over the next two to three years as we expand to over half of the world, where we are not yet available.
Looking across our full portfolio another area, where we see particular opportunity is in gaming, where we have 11 World class Studios and our unique amongst our media peers as both a developer and publisher of games.
Research has shown that Gen Z and Gen Alpha preferred gaming to any other form of entertainment and social media more than watching television or listening to music more than going to the movie theater games will be even more important to our fans in the future and so having this asset in our Arsenal.
As a critical differentiator.
And a real growth opportunity.
As a developer and publisher, we control quality and enjoy the full economic benefits of the games, we produce as well as capturing the broader franchise benefits across the company.
In 2023, we've released two of the industry's top 10 console games, including the number one game released this year Hogwarts legacy and.
And we still have the switch version to come launching next week.
Our Harry Potter fans immerse themselves in Hogwarts legacy playing more than 700 million hours to date.
That engagement helps not only our games business, but also helps build and revitalize the entire Harry Potter franchise.
And we know our fans want even more.
We've worked really hard on our games business for the last year and a half.
And it's also a business, where we have had a strong track record.
James has been a very successful in steady segment for Warner Brothers.
Over a decade.
We've been profitable in each of the last 15 years, averaging more than $400 million in EBITDA. The last three years alone. We believe games is a critical and very valuable asset for the company.
With a great deal of potential for growth.
<unk> has consistently enjoyed among the highest rois of any of our businesses.
And while we're smaller than some of the leading pure play gaming companies. Our operating margins are comparable to the best of the public companies. We are clearly punching above our weight and we're just getting started.
Okay.
And similar to the leaders in the industry, we've led with multiple key franchises.
Each of which is a $1 billion gaming property.
Harry Potter game of Thrones.
<unk> C, which is mainly Batman today, and mortal Kombat, whose most recent release Mortal Kombat. One has sold nearly 3 million copies since its launch in mid September.
So we've got the proven IP and franchises.
The World Class Studios and publishing talent.
We intend to continue to invest more capital and more resources into the business.
Our focus is on transforming our biggest franchises from largely console and PC based with three or four year release schedules to include more always on game play through live services multi platform and free to play extensions with the goal to have more players.
Spending more time on more platforms.
Ultimately, we want to drive engagement and monetization of our longer cycles and at higher levels were for specific capabilities. We're currently under scale and see significant opportunity to generate greater post purchase revenue.
Yes.
Bottom line, we've come a long way in 19 months.
And have built a very solid foundation for growth.
I'm energized by what we've done in such a short period of time.
And even more so than where we are headed as a company.
As I said at the outset, our industry is undergoing great disruption.
While there are some key factors that are out of our control like the economy and the impacts of the strike.
We do have a very strong handle on those areas of our businesses that.
We can directly influence.
Clearly there is still much more to be done.
On our sleeves are rolled up and more hard at work.
I'm as confident as ever that we have the greatest assets.
The strongest creative team.
The absolute resolve to make Warner Bros. Discovery, the very best it could be.
With that I'll turn it over to garner.
Walk you through the financials Gunnar.
Thank you David Good morning, everyone and thank you for joining us this morning.
I'm very pleased with the strong progress that W. BD continues to make across a number of fronts, particularly in light of the obstacles, we and the industry have had to navigate namely geopolitical and economic uncertainty and strike related constraints, we're operating with both greater precision and focus as well as increased.
80 of adaptability.
To that point, we've turned in another solid set of operating results as demonstrated by 22% ex FX EBITDA growth a year on year increase of over $500 million.
And very substantial free cash flow of nearly $2 1 billion. As a reminder, this is after our roughly $900 million of semiannual cash interest payment.
On a trailing 12 month basis, we have now delivered five $3 billion of free cash flow a remarkable improvement and only 19 months is one of those discovery, particularly in the light of where we started.
This quarter, we repaid another $2 $4 billion of debt, enabling us to address nearly all floating rate debt that was issued to finance the transaction.
In October we further repaid an additional $600 million of the term loan, leaving only $550 million of is variable and lately higher interest rate debt at bringing total debt repayment since closing of the transaction to nearly $12 billion.
We will continue to reduce debt as we generate cash and net leverage will be comfortably below four times at year end as previously guided I am proud of the W. BD, we will exit this year with a fundamentally improved financial profile as compared to the beginning of this year regarding command and control cost structure profitability.
And cash flow generation and the balance sheet.
Briefly on our Q3 segment results, which I will as usual discuss on an ex FX basis.
Overall studios' revenues increased 3% Barbie the highest grossing movie of 2023, thus far and the highest grossing movie and Warner Brothers history was the primary driver of segment revenue.
James was also a contributor which benefited from the release of Mortal Kombat one in September.
Of course weighing on this was the impact of the strikes on the production and delivery of TV content or television revenues declined significantly offsetting strong film and games performance.
We also faced tough comparisons against certain content licensing deals last year.
Finally segment EBITDA decreased 6% in part also due to greater marketing support behind film and game releases.
At networks total revenue and EBITDA were impacted by a modest decline in distribution revenue and the continued challenging advertising marketplace predominantly here in the U S where the market has continued to be weaker than we had hoped while international markets on balance remained more stable in comparison.
Looking ahead to Q4, we will be helped by the strong deals we secured for the upfront year, 2023, 24, and improving ratings trends on some of our core networks.
Taken together, while the market environment continues to be soft we are expecting an incremental improvement of our network segment AD sales in the fourth quarter.
Turning to D to C. We ended Q3 with over 95 million subscribers, representing a modest sequential loss largely as a result of an extraordinarily light competence light and some expected decline in the overlapping discovery and match those drivers.
Revenues increased 5% of our core subscriber related revenues distribution and advertising grew 5% and 29% respectively, while content decreased 17%.
Distribution growth was primarily due to price increases in the U S and certain international markets as well as a more favorable subscriber mix as noted previously wholesale subscribers, which have been declining tend to have lower ARP, who has been retail subscribers.
<unk> adjusted EBITDA was positive $111 million, representing a $745 million year over year improvement helped by both revenue growth and opex improvements with cost down 21%.
Our D to C team has done a remarkable job of improving the quality and financial profile of our streaming business.
Only 19 months into the combined operation as Warner Brothers Discovery and a few months after the launch of Max We're now on track to at least breakeven or even profitable across the <unk> segment. The swing of approximately $2 billion versus last year and very well ahead of our own plan.
This is an incredibly valuable asset and provides a strong vantage point for our path to long term sustainable growth.
Turning briefly to consolidated results revenues increased 1% to nearly $10 billion, while adjusted EBITDA increased 22% to $2 97 billion.
Year to date adjusted EBITDA has improved by nearly $1 2 billion year over year on a pro forma basis, even with pro forma networks advertising revenue now down nearly $1 billion in the first nine months of this year and the headwind from the ongoing work stoppage in Hollywood.
We continue to expect that adjusted EBITDA for the full year will be in the 10, 5% to $11 billion range.
Factors impacting where within that range. We end naturally include the tone of the scatter market in the U S. The performance of our three remaining feature film releases in December as well as the timing of content licensing.
Free cash flow for the quarter was a positive $2 $1 billion versus a negative $200 million in the prior year quarter, which recall was the first full quarter of the combined company the nearly $2 $3 billion positive swing year over year in this quarter alone illustrates the meaningful strides that we have made on all fronts.
Admittedly. This swing also includes some benefits from the strikes. So the vast majority of the improvement has been the result of our transformation efforts and relentless focus on efficiencies across the enterprise.
From finding deeper cost synergies with more than $3 billion of incremental cost synergies flowing through this year to driving working capital improvements and far greater discipline on capital allocation.
I continue to believe we are still very much in the early stages of realizing the full benefit of many of these initiatives.
I expect full year free cash flow to be similar to the trailing 12 months at the end of Q3 I E. In the $5 $3 billion range give or take with some further strike related benefits balanced against the tough comp in Q4 free cash flow last year, when we converted nearly 100% of our EBITDA to free cash flow.
Looking ahead to 2024 and with some preliminary thoughts from early stage budgeting I'd like to provide an initial perspective on a couple of points.
On the positive side I continue to be confident in our ability to further drive and maintain cost discipline by the end of this year, we will have realized over $4 billion of cost synergies and we will have already implemented initiatives to deliver more than $5 billion through 2024 and beyond as I have detailed in the past.
Second with our strong cash generation significantly reduced leverage the outstanding results. Our games business has delivered the turn to profitability of our streaming business and the clear value in our ability to drive franchise returns across the company, we see more and more opportunity for investing and sustain.
<unk> profitable growth.
As David alluded to and as we shared with you over the last quarter. As we are planning for 2024, we are examining ways to reinvest at a slightly faster pace into these growth Avenue.
This will be most relevant in areas such as marketing support for Max and the U S and in conjunction with launches in Latin America and EMEA.
Including new market.
Particularly given the high profile release schedule Casey has assembled.
The Olympic games in Paris next summer.
Our disciplined framework centered on rigorous analysis of subscriber acquisition cost customer lifetime value and return on investment.
Firmly guy at this process and support continued traction and revenue growth, while maintaining our focus on longer term segment profitability targets.
On the challenging side it is becoming increasingly clear now much like 2023, 2024 will have its share of complexity, particularly as it relates to the possibility of continued sluggish advertising trends.
To that point, while streaming advertising remains robust the state of the overall linear AD market during the second half of this year has been disappointing.
And looking ahead, while it is early the timing of an AD recovery is currently difficult for any of us to predict with any conviction.
And finally as we begin to formulate the initial framework of our television production business getting back to work into 2024, there is simply a lot we don't know yet.
While we have every confidence so this will eventually right itself throughout the next year and there should be an eventual tailwind from the end of the work stoppage. This is an evolving process and there is a real risk at this point that some negative financial impact of the strike will extend into 2024 to some extent.
Here's what these factors mean as we look ahead.
We will exit 2023 with great momentum and leverage reduction we have taken significant financial and operating risks off the table over the last year and we are fully committed to our gross leverage target range of two five to three times adjusted EBITDA.
That said, taking together the factors just mentioned for an early view on 2024. It is unlikely from today's perspective that we will hit our target leverage range by the end of 2024 without a meaningful recovery of the TV AD market, we remain hopeful.
Indeed, we expect to continue to generate very meaningful free cash flow key building blocks to consider for 2020 for free cash flow remain number one.
Around $1 billion tailwind of cash cost to achieve largely going away.
To lower our cash interest expense and number three further progress.
AP driven working capital initiatives.
Set by the potential headwinds I've noted most importantly, a potential further decline in U S advertising and of course, the return to a normal content capital spend as well as the incremental growth in investments I noted earlier.
I remain very comfortable with our leverage and our Delevering path is underpinned by the strength of our free cash flow conversion.
Looking at our maturities over the next five years, the average amount of debt coming due is below $3 billion per year.
Our debt stack is long dated and low cost with the nearly 15 year average maturity and a weighted average coupon of a little over four 6%.
But the vast majority of our remaining debt being fixed we will be largely insulated from rising rates.
And in fact will have increasing opportunity to retire debt at a significant discount.
As I stated at the beginning of my remarks in a very compressed timeframe. We have made very significant progress as an organization and what remains a very complex and disruptive periods in the industry.
And now our transformative efforts have better positioned us to compete.
To respond to industry dynamics.
And to participate with strong operating leverage when the macroeconomic and end market backdrop eventually turn positive.
And with the initial phase of integration work largely behind us and the free cash flow engine continuing to fire on all cylinders, we're more focused than ever on driving sustainable and profitable growth that will enhance the financial and competitive profile of the company over the next several years with real upside to shareholder value.
Thank you again for your time this morning, and now David J P and I are happy to take your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and your first question comes from the line of Steven Cahall from Wells Fargo. Your line is open.
Thank you good morning, so David you've now experimented a bit more with licensing putting some shows on some major streaming partners from the HBO Library, and I think you've successfully had licensing arrangements in the past such as the deal with Sky.
So as you think about some of that really strong HBO content going forward, whether it's library, whether its prior seasons of shows that are returning like true detective or whether it's some of the franchise shows like friends how.
How do you think about what should be on Max and what can be elsewhere, particularly when there is partners that are willing to pay a lot and maybe have a bigger reach than than Max.
And then you talked about the engagement that you've seen on Max from CNN and sports and Bleacher I'm curious, whether you think that content sits.
Sits on Maxwell and justifies the cost and on the sports side, where do you see kind of sports emerging into streaming over the long term is it an add on tier is it integrated are you interested in partnerships with other DTC sports services like we've heard from a peer thank you.
Thanks, so much Stephen.
We'll look where we're probably the largest producer of of TV and motion picture content and we have one of the largest TV and motion picture libraries in the world. The good news is that on Max we're getting to see what people use.
And when we get to see where they go first how much time, they spend with it and so we are in the business of monetizing content through windows. There's a lot of content that we see is just for US. This is content that people come to Max for and it's important and it's important that we distinguish the Max brand as being the highest quality.
Brand in in this space.
And really taking casey's content out.
It's white Lotus.
The last of us.
All of the great hits that HBO is having one of the great runs that Iran, Max and taking advantage of that.
Having said that there is a lot of content, that's not being consumed heavily on Max and so those are the easy ones everything that we license is always not exclusive we keep a full the full rights to all of that content and we have it on Max and in some cases, we also have it on Avon.
So we really get to Monday morning quarterback and take a look.
And in terms of some of the content that you've seen like DC, we put those in in windows. So someone might have it for three months or six months, we always have those movies and we have the complete set of all of those movies and candidly. We have found one we won't do it unless the economics are significant but.
Any cases, it really helps us people come back and then they want to see the full okay of DC movies and the only place to do that is with us or it enhances.
The quality of the D C library.
Overall, I think we're we're trying to figure out exactly how to maximize the value and we debated all the time I think we're doing a very good job.
But as I mentioned there'll be a lot that you'll never see because it just belongs to us on the news and sports.
Look we're only six weeks in.
But it is quite encouraging that.
We've looked at what happens to the people that spend time watching news and sports and churn is down and engagement is up some cases engagement is up meaningfully that people that are watching and.
In many cases and the overwhelming majority of cases are people that don't have pay TV. So we're reaching a whole new audience and the audiences are younger.
With CNN, Max we launched effectively a whole new service and we really geared towards a younger group of people that are more <unk> digital viewers and Thats, what Mark Thompson and the team will continue to work to do but I think that's a real advantage to have the great quality content, albeit for the last.
Couple of months, we haven't had our best content, we pushed off.
True detective.
Because.
We couldnt have Jodie foster to promote it and so you'll see a very strong lineup next year with <unk>.
Our unique and that we'll have news sports and entertainment and and the library content and we're so confident that we really want to get behind it in a bigger way and.
And the fact that we're now this quarter, we made $111 million, we said, it's not about how many subscribers it's about how much money.
And we're starting to really see that we can generate more economics, but we think we can grow the service in a meaningful way.
Finally, I think that the sky issue was really different there were some markets in that market. The all of the Reits were sold to sky until the end of 'twenty five.
There are some markets that we will not go into in India, we were not making money for a lot of years, we werent, making money at discovery Warner wasn't making much money.
In terms of what the the Warner product and so we structured a deal with reliance with James Murdoch and that team that was a great deal for us and a great deal for them they get to package all of our content with cricket and some more local content.
It will come back to us it'll be branded so in a few years will look back and say should we get into India now, but in the meantime, instead of it being.
Eight.
A business that were losing money and we're only making a little we're making a lot of money and our brand is being built in India that will be the case in a few markets.
But we really have ambition now to take Macs around the world, We think that and that's one of the things we want to invest in the Max and the gaming business has two businesses. We think we could really see growth in <unk>.
Finally.
Our sports business is meaningful and for the last several years, we've seen the advantage of sports on subscription so.
But we don't own all of sport.
So the idea of being able to put it onto our platform is great. But we're also going to be looking and are looking ive been saying bundling is important I think bundling in terms of the entertainment package is important the ability for us to get together with others domestically around the world I think it's a better package for consumers.
Could likely reduce churn and get better economics, I think thats the way the industry is going to go and I think that's probably where it's going to go on sports as well, which is good for all of us.
Thank you.
And your next question comes from the line of Jessica Reif Ehrlich from Bank of America. Your line is open.
Yeah.
Thank you I mean, it's clear you've done an amazing job restructuring the company and improving the balance sheet.
As you can see even from todays numbers the persistent headwinds from linear.
Which is your biggest business is just such a challenge. So as you think through the next few years and you've kind of outlined some of the growth.
Areas like games in sports and news.
Maybe some of the traditional areas like film and driving DTC.
And with critical IP I'm, just wondering like how are you thinking is that enough to offset these linear challenges and in your conversations with advertisers.
A big revenue driver it is.
Is it is it kind of have to.
Traditional or is it just permanently moving to digital and Avon in retail and I guess the.
The last part of that is you have an amazing library and it is underutilized so is it.
Can you can you help us think through does it show up in film doesn't show up a T V D C et cetera. Thank you.
Yes, Jessica let me maybe take this one so.
Again, you heard the comments we made.
On the advertising market and the reality is so far we're unfortunately not seeing the improvement in Q4 that I think many had hoped to see earlier in the year and Thats why you know while it's early to be talking about 2024 and beyond we felt it was cool.
Prudent to be transparent about what we're seeing in the market to your point.
We don't see when this is going to turn but what we have done over the past 18 months as we put this company into fighting shape and I have no doubt the market is going to come back at some point and when it does I think we will be able to participate with very significant operating leverage given what we have put them through this transformation here over the past 18 months and also do.
We're not giving up we really believe in linear and in fact, there was a lot of noise around the charter deal.
With Disney but to Bobs credit that was a deal that deal was structured in a way that's really favorable for both parties and favorable for the ecosystem.
The idea that the all of the cable subscribers are now paying a fee for Disney plus.
Is it positive.
As they have said the churn on that will will will be very low.
And the reach will go up and they'll be able to sell advertising of course.
And the environment, where there is now.
That is likely to help linear creep.
Creating a bridge and you can imagine a world as we're redoing our deals or even advance of redoing, our deals to get Disney plus and Max.
As an additional benefit to the cable subscribers to be get getting paid on each one of those and having avid being able to sell advertising against each of those and having lower churn on each of those and so I think it was a very innovative deal by charter and Disney and although it started out noisy and scary.
I think it created a potentially a very.
Interesting bridge to more scale, lower churn and more stability to linear we'll have to see it certainly is a positive.
And so maybe to comment on a couple of the growth opportunities that you mentioned Jessica.
I do think there is tremendous opportunity and I do think we will be able to get behind that that's why when David talked about shifting.
Shifting the investment focus a little bit, but starting with the games business, we spend a lot of time over the past year going into a lot of granular detail across all of the areas of our capital allocation and the games business has has shown tremendous tremendous success not only from a P&L perspective really as David said contributing hundreds of millions of dollars to work.
Consolidated profits, but also from a return on investment perspective.
Double and triple check some of the other metrics here, because it's such a great investment opportunity.
I'm stunned that we haven't been investing more into this opportunity under David <unk> leadership, yet I think we have to do more theres a lot more opportunity there and we're gonna start tackling that on the <unk> side again, just take a step back here over over just a year and a half we're now looking.
For this year at a breakeven slash positive business after $2 billion of losses last year, we've right sized the structure, we've got a state of the art platform.
As David said, we're coming off a quarter with virtually no fresh content on the platform, we want to get behind that when we come back.
Casey's content.
Comes back to the platform, we want to get behind it we know that we can get tremendous returns on our marketing spend behind new content and and we will we will take advantage of that and I do think we have a real opportunity here.
And on the film side and B that the TV production side as I said, it's still a little fluid. Unfortunately, we don't have a resolution for the strike yet, but clearly that.
That business should be.
Coming back to growth after being a very significant drag.
Drag in the second half of this year. So a lot that we that we want to get behind on a lot, but I think it is going to contribute to growth for the company and also on the linear side itself. We're not on the sidelines I mean, we're not just standing by watching Theres a lot that the team is working on that.
Campbell and John Stein level have restructured the sales team, we've got more opportunities and dynamic AD insertion, but we've got more opportunities and utilizing our data with every additional add light subscriber we're gonna get additional reach additional scale, which helps on the pricing side. So there's a lot going on again.
I decided to be.
Open about the AD market this morning.
As I was because we feel we have to be transparent here, but there's a lot we're doing and as I said we're hopeful.
The.
The other side of growth.
This is stability and sustainability.
What we've done in the last 19 months.
Is turn this into a real company.
With real with real professional management and real free cash flow. This is a generational disruption we're going through.
Going through that with the streaming service, that's losing billions of dollars.
Is it is really really difficult to go on offense, it's difficult to maneuver.
And with interest rates the way they are at the challenges in the marketplace advertising. This is when you're going to see which are the real companies.
This is a company that's generating over $5 billion in free cash flow, we paid down $12 billion in debt, but that gives us is stability and sustainability and ultimately in a difficult environment, it's going to give us optionality.
We're surrounded by a lot of companies.
Or don't have the geographic diversity that we have arent generating real free cash flow have that are presenting issues. We're delevering at a time when our peers are levering up at a time when our peers are unstable and there is a lot of excess competitive excess players in the market.
So this will give us a chance not only to fight to grow in the next year, but to have the kind of balance sheet and the kind of stability of a real company diverse gaming TV motion picture HBO linear.
We could be really opportunistic over the next 12 months to 24 months.
Great next question next.
Next question comes from the line of Robert Fishman from Moffett Nathanson. Your line is open.
Hi, Good morning, I have one for David and one for J P are good there.
David given the increased investments that you guys are talking about how should we think about expectations for content spending, but where you shake out. This year and then just early thoughts on if that goes up or down next year after factoring in.
Video games spending and all the other factors there.
And then for JV and greener.
Given the accelerated profitability in DTC that we've seen so far how should we think about your prior guidance guidance about 24, and 'twenty five profitability and are you more confident in reaching the longer term margins of 20% plus.
Okay.
And then maybe I can maybe I can start here. So so clearly again from a year over year perspective, we're going to see increases in content cash spend next year, just because we haven't been able to deploy it at.
At full speed here over the second half of 2023, but again, if we look at the the change in our overall posture for content allocation. There has been a bit of a strike impact no doubt, but we have also.
As you know significantly right sized our spend across the various genres on the basis of.
A thorough analysis of return on investment and some of that.
Was expressed in some other content write offs that we.
Early when we combined the two companies, but Thats also led to a reset.
And our overall capital allocation and when we say, we're going to invest that doesn't mean that all of that has to come on top there is an opportunity to reallocate within our very significant and broad content.
Portfolio here, but net net as I.
As I said, a couple of minutes ago, there will be a.
A headwind to free cash flow from re accelerating content spend next year and before I pass it on to J B, we standby our profitability targets long term for <unk>.
We do believe that this can be a very profitable.
Lineup business as a part of an integrated media portfolio, if anything I have to say, we're doing better than we thought and we're moving faster than we thought which is expressed if you just compare what we're doing this year relative to what we guided a year ago, a year and a half ago, we're well ahead of that curve.
Which puts us in a position to.
Our focus on growth a little more as we go into next year.
And I think just to add to it when we look at the next two years the things the levers that we rely on to get us to.
That financial profile that we outlined a year ago over a year ago really as you know.
Anchored in strength of content, which David talked a little bit about with a much more impressive 24, and I'd say, an even stronger 25.
Price, we've you've seen us obviously move on price we've had very good results.
Both minimize churn and great incremental revenue growth related to our price increases around the world advertising.
Strength through the release of more.
Ah the analyte product here in the U S as well as more markets coming around the world new market launches.
Churn reduction, which David mentioned, a little bit about earlier, but we are seeing finally, some great progress, particularly with the introduction of live here in the U S.
On both cancel rates at auto renew off coming down which are great indicators.
And so we are ultimately we feel very confident that we're at an exciting moment over the next 12 months to 24 months, particularly as we look at the global rollout starting in the first quarter next year of Max to take this to another level.
Yeah.
Your next question comes from the line of Rich Greenfield from Lei Chen Your line is open.
Hi, Thanks for taking the questions.
I think I look at your D to C segment, you've done a pretty decent.
You've taken a pretty incredible amount of cost out of the business.
I wanted to shift and focus a little bit on the network segment, if I just look at it.
The Q3 numbers I think the cost structure is down to about two 5 billion between cost of revenue and SG&A how.
How much room going forward do you have to reduce that obviously sooner you were very open and honest about the state of the AD market and cord cutting et cetera, and just wondering how to think about how much that two and a half billions worth of quarterly cost base can come down and what are the big levers you can Paul and then just maybe if you could just from a housekeeping.
Standpoints I think everyone's just trying to do the math on sort of what you're implying for next year EBITDA.
Anything you can do I mean, it seems like Youre, pointing is sort of roughly down but I'm. Just curious if there's sort of any sort of the range you want to point the street to when.
When youre thinking about leverage being higher than your target would be super helpful to just understand the thought process. Thanks.
Yes, Rich let me let me maybe let me maybe start right there.
I did not I did not intend to guide down EBITDA for next year relative to where we are today. The only reason I brought this up is we have guidance out there of hitting our leverage.
<unk> range by the end of next year and again based on the early indications that will that we're seeing from other market is developing right now I'm just not confident to stand here today and say don't worry about it we're definitely going to hit that range now if you have a view on.
Ed market recovery.
And if you think there's a market recovery in 2024, we're going to have a great year.
Not in a position right now to to provide firm guidance.
That I've laid out some of the some of the building blocks.
Again, a much more profitable.
Streaming business, which we're going to try to fuel growth, but again, let me be clear that doesn't mean that I'm expecting to start losing money again, we'll just shifting.
<unk> to prioritize growth over sort of the maximization of.
Immediate.
Profit growth linear business the network business. It is what it is and I will talk about the cost side.
And then on the studio side, we should be seeing a.
A recovery as the strike hopefully comes to an end but.
It's too early to be any any more specific here to your point on the linear cost base first of all.
I do want to just call out.
What a great job get hard Kathleen and others, including CNN people have done in right sizing the business as we brought these two companies together and I think we're looking at a very competitive cost structure, which is one of the reasons why I'm. So confident that when the market comes back we're going to be participating with a pretty high flow through.
Profits, but as I said earlier, we're not going to be standing on the sidelines here and just watching there is a lot more that's in the pipeline some of our transformation initiatives, especially on the technology side, just have longer lead times and we're still evolving when it comes to.
Let's call it the operational backbone of how we how we are how we operate our content workflows throughout the company by the way not only impacting.
The network segment, but the company as a whole as well. So there is definitely more opportunity there and then one other one other point that I've made before is again, we decided to go with a three segment reporting.
Our reporting structure, because that's how you know David looks at the company and how I think from an investor perspective.
You get the full transparency into the different the different business models and their financial profiles, but one thing thats going to be increasingly relevant as managing our content investments in our content utilization across one Warner brothers discovery, that's one area, where so far it's been a bit of a one way street.
<unk> networks.
Creating content that ends up on the streaming platform longer term as that platform grows and drives more revenue and profit contributions there may also be.
The flow in the other direction, which which inevitably will drive profitability of the linear business.
Beyond what we have today.
Your next question comes from line of Ben Swinburne from Morgan Stanley. Your line is open.
Good morning.
A couple of housekeeping Gunnar I was wondering if you are able to quantify the benefits of cash flow from the strike. This year I know, it's still a moving target and then also whether there is a way to quantify the sort of incremental synergy capture you expect next year versus this year you had some numbers in your prepared remarks.
And then maybe a more more interesting question for David.
David the strategy around expanding Max with news and sports seems quite logical end and compelling youre, adding reach maximizing distribution ultimately revenue.
And it seems like you think the charter Disney read is a positive one.
To hear more about because I could also see the other side of the argument, which is taking your core linear IP and CNN.
The NBA baseball et cetera, and putting it on Max could actually caused some consternation on the distribution side of your business. So maybe you could spend a minute just talking about how you how you see that glide path working with your Max strategy. Thanks, a lot.
Sure. Thanks, Ed.
C N N Mac not CNN.
There are some hours that our simulcast but it's a it's largely independently produced for a younger and different audience.
And it's we saw this in eastern Europe that have provided real value reduce churn and provided real value and the people that spend time watching live content as Jamie has said and we've seen it here already and it's only six weeks in you spend time watching news and sports.
That the engagement is higher and the churn is lower.
And that's a big deal.
<unk> is the biggest issue that we face.
This is a very compelling service the churn is too high. So we are this is an all on attack to reduce churn.
Reducing churn also will reduce marketing because we're not going out and marketing over and over again to subscribers that are coming in and out so the idea that the.
A big majority the overwhelming majority of people that are watching match don't have pay TV and they're now able to come in and see what's going on in Israel whats going on on the floor and on the Hill.
Is it feels like it could be compelling and the same thing with sports we saw a real big numbers. So overall, we think this buffet entertainment nonfiction as we've said all along the better the engagement the more people in the family of watching the better will be we still and we still haven't really been.
But a crack the kids, we have a huge amount of kids' content when they haven't been able to crack that we're going to attack that as well.
So we think that strategy.
Is.
Really differentiates us and we're going to have to really promote it we haven't been J b youre at ground level here, Yeah, just going to add the only other thing Ben is you got to remember HBO and HBO Max and Max now have really been doing the opposite of what the industry has sort of been complaining about which is.
For.
HBO subscribers, we've been giving more value to the bundle not less they've got they used to get a number of HBO original series and movies.
They now in 2023 get all of that plus a whole host of library content from Warner Brothers are that they never receive Max original is that they never receive and so our position in the market for years has been providing more value to the cable ecosystem for those subscribers not less and the charter deal.
Really creates this very creative path of instead of having two completely separate ecosystems. So the idea that you could have a distributor.
That's paying us a per sub fee for a discovery plus and a per sub fee for Max.
And both of those being add light.
Is an incremental advantage, it's an advantage to charter and there they and Bob came up with this creative.
Road forward, but it is.
And we think that stabilizes the ecosystem, but it also was helpful in building more scale J b.
We're modeling it out the other day and I think David's point on scale is exactly right, which is we know this business is always needed reach.
And we're looking as we said and David I think in <unk> prepared remarks.
Encouraging thing that we've seen already in the last month with both sports and news on Max has proven out further is these customer segments are increasingly complementary.
Versus cannibalistic and so the age demographic, we're seeing the much younger demo on Max.
And the non pay TV the <unk>.
Vast majority of the viewers being non pay TV subscribers leads us to believe that these two can coexist and should co exist. If we want to be in a max reach maximizing.
Strategy, which we do and so we.
We like the profile of it and we think we can continue to find constructive ways to work with our traditional affiliates to make it work and we got the cash.
To invest in promoting it to invest and taking it around the world and to invest in whatever else. We think we need to grow I mean, the key element here of this company now this company is a free cash flow driven company.
<unk> 5 billion and free cash flow $12 billion paid back so far in 19 months. We said we were going to be less than four times levered, we will be less than four times leveraged comfortably. So it's all about I believe not only the quality of the content.
<unk>.
What's the stability of the company, it's all about free cash flow, who has it and who doesn't.
And then even to just comment on that.
First two questions, so starting with with our synergies again.
Get incrementally more difficult to differentiate between what the synergy what's transformation, what's just normal cost work but to.
To recap, what I said earlier I expect $4 billion.
Total synergy to have flown through until the end of this year.
We'll have implemented initiatives that will generate $5 billion of run rate initiatives and we're still going we're still adding to the program and I think thats. The most important point, while we might not be reporting on this in detail any more while we not might not call. It synergy we have had a.
Our continuous improvement team at work for the past five years, we never stopped after integrating Scripps and discovery because the environment around us keeps changing and we're making sure that we change faster than than the environment around us. We've got a very capable team. That's got five years of experience, we will keep grinding through every cost opportunity in the company and we will.
Well, we'll keep delivering and then to answer your strike question again. This is everything about a precise science right but.
My current estimate for the full year is there is probably going to be a few hundred million dollars of a negative impact on EBITDA.
The television production business and licensing business data is a major part of our studio operation and has been essentially.
For the best part of this year.
And on the positive side.
At least from a short term cash perspective, I expect several hundred millions of dollars of positive cash flow flowing through from the fact that we're unable to deploy capital again Thats a short term point and those are my my best estimate right now.
And your final question comes from the line of Brett Feldman from Goldman Sachs. Your line is open.
Great and thanks for taking the questions two if you don't mind.
You, obviously see the value in being able to get your streaming product into a deal similar to the one that Disney got with charter of course, the tradeoff. There was that Disney had to agree the drops in channels. So I'm curious if you're willing to make a similar tradeoff in order to get that type of distribution and churn improvement for Max and I'm also curious whether that might lead to some cost savings if you will.
To arrange something like that and then Gunnar you talked about it as an average of about $3 billion of debt maturities over the next couple of years, It's obviously well below the current free cash flow run rate. So I am curious from a modeling standpoint should we be assuming that you will not only use your free cash flow to pay down debt maturities, but even go into the open market and repurchased debt at discounts and other.
The words is there any particular reason you would need to sit on cash.
Sure, let me start by saying.
We've gotten through including recently.
All of our deals with all of our channels being carried we really do have a different model we have affinity networks.
HGTV food TLC discovery animal planet, and we're investing in in or TBS TNT, we're investing in all those channels, we still believe in linear.
And then and with sports and news were anywhere between 25% and 45% of the viewership on cable. So when you think of what is basic cable it's us.
And when people think about what they love the 345 channels that they love us.
And so.
And we're not that expensive.
We're not proud of it.
The reason, we've been able to continue to get increases is because we provide real value and we're one of the few media companies that still investing significantly in original content and when nourishing our audiences and if you look at our ratings in the last couple of months Kathleen is doing a terrific job the ratings on our networks are going up.
So we.
We feel really good about our deals.
Feel good about partnering with the with the operators in in building and continue to hold on as much as we can to the linear marketplace.
And we can make some tradeoffs as a few of our channels that are that are lighter we can make some trade offs, but I think it will be additive and I think it'll be a real advantage to us to have somebody else in the marketplace that wants to.
Retail and guarantee a payment of a significant number of subs to us.
And then Brett.
Your question on the debt side.
Two things number one theres going to be a lot of cash flowing through here and.
To answer your question directly no. There is no need to sit on excess of the amount of cash and as we've said multiple times, we're focused on reducing our debt.
To that targeted range.
Quickly as possible and number two is our capital structure is a real asset again I went through earlier.
The average maturity the average interest rates and the trading levels of the debt and I feel very good about our ability to further chip away at that overall.
Overall debt quantum and potentially at a very attractive terms.
More and more cash becomes available here.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Yeah.