Warner Bros Discovery Inc (WBD)

• WBD's Max streaming service added over 7 million net subscribers in Q3, driving significant EBITDA growth, and expects continued revenue, profit, and subscriber growth in future quarters - .
• The Studios segment is set to bounce back profit-wise next year, with expectations to reach $3 billion and then further growth, driven by improvements across the film group, TV production, franchises, games, and content licensing, leading to sustainable long-term growth - .
• Strategic partnerships and potential industry consolidation are seen as opportunities to enhance shareholder value and improve consumer experience, with WBD engaging in partnerships like the Disney Max Hulu bundle to drive subscriber growth - - .

• Studio business recovery may take longer than expected, as the financial impact of changes will take time to become visible. -
• Net leverage increased to 4.2x, and the company expects to delever more modestly than initially planned due to studio shortfalls and impairments. -
• Management did not commit to any strategic asset sales or spin-offs, potentially missing opportunities to unlock shareholder value. -

1. Studio Profit Outlook
   Q: Can you discuss expected profit rebound in Studios next year?
   A: Management anticipates the Studio segment will bounce back profit-wise across the board next year, with better results in the film group, continued momentum in TV production, and recovery in the games business. They are confident in seeing $3 billion or more in growth from the Studio segment, although the exact timing may vary. Content licensing is also expected to be higher from the 2024 starting base. -

2. Integrated Business Structure
   Q: Why keep all businesses together despite growth and decline in different segments?
   A: Management believes strongly in the benefits of operating as an integrated company. They see significant returns from running WBD as one entity, particularly in content where synergies across segments enhance value. They acknowledge the current stock price doesn't reflect the underlying value and are focused on enhancing shareholder value. - -

3. Industry Consolidation Prospects
   Q: What are your views on potential M&A and industry consolidation?
   A: Management emphasizes the need for meaningful consolidation in the industry to improve the consumer experience, which currently involves navigating multiple apps. They believe consolidation could provide a better consumer experience and create stronger businesses. An upcoming new administration may offer opportunities for consolidation, providing a real positive impact on the industry. - -

4. Cable Networks Sustainability
   Q: How confident are you about upcoming renewals with Comcast and Sky, especially without the NBA?
   A: While not discussing specific deals, management expressed confidence based on longstanding relationships and successful collaborations. They emphasize their valuable content and significant contribution to the basic cable bundle, which is recognized by distributors. They expect to continue working closely with partners like Comcast and Sky in the future. -

5. DTC Subscriber Growth
   Q: How will you close the subscriber gap with competitors like Netflix?
   A: Management sees significant opportunity to grow subscribers, especially among price-sensitive households. Strategies include expanding the ad-supported tier, introducing bundles (e.g., with Disney and Hulu), and leveraging partnerships. They have observed that past price increases resulted in lower than expected churn, indicating pricing power. - -

6. Pricing Power in DTC
   Q: How much can price increases drive DTC revenue in coming years?
   A: Management believes they have room to continue raising prices due to the premium nature of their product. Previous price rises resulted in lower than projected churn. They also plan to address password sharing, effectively acting as a price increase. International markets present additional opportunities for price adjustments. -

7. Advertising Revenue Growth
   Q: What is your plan to scale advertising in DTC, and when will you get there?
   A: Management is in the early stages of growing advertising revenue in DTC by increasing reach of the ad-supported tier, modestly increasing ad load (which is currently light), and innovating in ad formats. They believe these three levers will provide significant scale in advertising revenue over time. -

8. Cost Reduction Strategies
   Q: How do you plan to lower costs in linear networks to offset revenue declines?
   A: Management will continue to be disciplined and focused on cost reductions, implementing structural measures that have taken longer to realize. They have taken out billions of dollars from the cost base despite inflation. Investments in sports with high margins and a largely fixed cost base are expected to help offset revenue pressures. - -

9. Distributor Partnerships
   Q: Are you discussing similar structures to the Charter agreement with other distributors?
   A: Management is encouraged by the innovative deal with Charter and hopes other distributors will adopt similar models. They are in discussions with some who are interested in pursuing such partnerships, aiming to provide a contemporary consumer experience that combines streaming and traditional multichannel options. -

Quarterly guidance for Q4 2024:

• Subscriber-related revenue growth and EBITDA contribution: similar levels - - (no prior guidance)
• Free cash flow: healthy conversion of EBITDA in Q4 2024 - (no prior guidance)
• Net leverage: expect to delever year-over-year with a long-term target of 2.5–3× - (no prior guidance)
• Studios business: Q4 2024 EBITDA expected to increase by a few hundred million dollars year-over-year - (no prior guidance)
• Overall company performance: improved profit results for Studios in Q4 2024, aiming for at least $3 billion in growth - - (no prior guidance)

Annual guidance for FY 2025:

• D2C EBITDA: confident in exceeding $1 billion - - (no change from prior guidance “targeting over $1 billion” - - - )