Warner Bros. Discovery - Earnings Call - Q1 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Inc. First Quarter twenty twenty one Earnings Conference Call. At this time, all participant lines are in a listen only mode. At the conclusion of the speakers' presentation, there will be a question and answer session. Also, please be advised that today's conference is being recorded.

I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Speaker 1

Thank everyone. Thank you for joining us for Discovery's Q1 earnings call. Joining me today are David Zaslov, President and Chief Executive Officer Gunnar Liedenfelds, Chief Financial Officer and JB Perrette, President and CEO, Discovery Networks International. You should have received a copy of our earnings release, but if not, feel free to access it on our website at www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we'll open the call to take questions.

Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward looking statements that we make pursuant to Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events and may 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 our Form 10 ks for the year ended 12/31/2020, and our subsequent filings made with the U. S.

Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Speaker 2

Good morning, everyone, and thank you for joining us today to review both our Q1 performance and the meaningful progress we are making since our launch of Discovery plus Across our operating segments, brands and global markets, I couldn't be prouder of how our company has executed. Nia flawlessly responding with creativity, precision and focus across the board, while at the same time accelerating the pace of innovation throughout our organization as we embrace substantial growth opportunities around the globe. We continue to reposition the company and put it on a path of sustainable growth for the long term. Our ability to generate free cash flow is crucial, allowing us to fully fund our pivot and underscoring the efficiency of our model. Indeed, even during this moment of increased investment, as clearly evidenced in our financials this quarter, Our free cash flow machine is working harder than ever, and it is reinforcing an evolving narrative about Discovery's differentiated hand.

With the strong global launch of Discovery plus we are now scaling a very well received global direct to consumer offering that complements our incumbent linear channel presence in every television market around the globe. In Q1, Discovery had the most watched domestic pay TV portfolio. Internationally, we enjoyed an impressive seventh consecutive quarter of linear share growth, anchored by our twenty seventh straight month of growth in our female genres and best ever quarterly performances in several markets, including The U. K, France and Germany. This growth was supported by the continued global expansion of our Scripps lifestyle brand and content.

We achieved this while simultaneously launching and building Discovery plus Our continued strategic focus leverages Discovery's powerful competitive advantages: well established consumer connections in every market in the world, vast local language IP ownership, deep and expanding distribution relationships and a super efficient content production model to power both our global direct to consumer expansion and our core linear business. To achieve this, we are investing more than ever before in our content across the board to support these platforms. So far in 2021, it is all coalescent and exceeding all of our early benchmarks across almost every KPI. We are pleased to report that just four months into our U. S.

Launch of Discovery plus and with the vast majority of our international expansion still ahead of us, we have 15,000,000 total paying subs across our global direct to consumer base. And we continue to move forward with strong momentum. When I think about our 15,000,000 direct to consumer paying subscribers that we have today and the fact that we were able to add 10,000,000 paying subscribers since the end of last year, we're just

Speaker 1

really impressed with our traction.

Speaker 2

At the end of Q1, we crossed 13,000,000 paying global next subscribers, representing sub growth that compares quite favorably to our peers over the same period, underscoring the value, appeal and stickiness of our content, all of which supported our conviction about our opportunity ahead. But our sub count tells only part of the story. We are equally encouraged by early metrics and KPIs across engagement, churn and monetization and ARPU, particularly in The U. S, which likely place us at the very top of an impressive list of peer offerings, many of whom have had a far longer runway thus far than we have. Role to pay has been between 8085% of free trial subs.

Engagement is approximately three hours per day per viewing subscriber and well ahead of linear. Retention is strong, giving us confidence that while early, monthly churn is trending towards low single digits. Consumers clearly love the Discovery plus product. We see that on social, in the App Store product ratings and the feedback from partners, clients and talent in the marketplace. Our App Store ratings rank as among the sector's top.

Our Apple App Store rating is 4.9 and based on a very large number of reviews. Our strong early KPIs are driving exceptional monetization. Our $4.99 Ad Lite product with only four minutes of commercial time generated over $10 of ARPU in the quarter, already well ahead of our longer term goal and it's still trending up. Our overall blended U. S.

ARPU of around $7 is already in line with what we generate in linear and we see healthy momentum for that figure to grow during the course of this year. And on a global blended basis, we are seeing ARPU of over $5 Bruno will provide some additional detail on metrics and KPIs. But in short, we are working towards a substantive customer lifetime value, particularly as contrasted against the cost to gain a subscriber, encouraging us to lean in from an investment standpoint when it comes to marketing, technological capability in order to maximize this meaningful growth opportunity. We have an extremely focused approach on all the ways we can be available to the broader swath of users while driving a rich and dynamic user experience. A cornerstone of this will be expanding our partnerships with many of the world's leading distributors and platforms.

We recently launched on Comcast Xfinity Flex and soon on X1 and are deepening our relationship with Amazon around the globe with availability on prime video channels in The United States and a global rollout planned for other PVC markets. Now let's look at Italy. It's a great example of a market where we see encouraging early signs of the long term growth potential against which we are executing our strategy. Bringing together our market expertise, strong local talent, sticky original content, management resources and relationships, production and technology infrastructure and popular brand and channel presence. Like a number of other markets in Europe, Italy is relatively underpenetrated with respect to pay TV at roughly 20% with really one main distributor.

It has significant mobile penetration and usage and where Discovery enjoys a healthy pay and free to air presence with depth in local in language content. And though we have grown our audience share, the existing Pay TV market structure limits the upside from this segment of the ecosystem. The launch of Discovery plus has catalyzed a new growth trajectory. Our addressable market has grown more than 10x from pay TV to now include mobile and broadband. Discovery plus enables an entry cost for premium video that's 75% plus more affordable than traditional bundles.

And Discovery plus ARPU are already more than 3x greater than our wholesale portfolio. This is a powerful combination of potential universe and price growth. What we are seeing in Italy guides our thinking on the prospects of what our other international markets could look like. There are significant markets such as Brazil, Germany and Australia with similar characteristics and where our ability to offer a direct to consumer offering, packaged with mobile or multi platform operators, should ultimately result in new customers, higher ARPUs and a deeper direct connection with our Of equal importance is the balance we have been able to strike across our linear and direct to consumer businesses. Reflecting on our Q1 performance, which by many measures is still facing COVID related headwinds, I'm proud of our team's ability to manage through difficult operating circumstances, and you will see that in our Q2 outlook.

Gurinder will take you through the details, but I'm pleased to note that in every international region we're seeing positive advertising growth versus 2020, with record shares in Q1 from major markets like U. K, France and Germany. We are seeing the great resilience in our advertising business, not just internationally, but also domestically. This, taken together with very strong scatter pricing in The U. S.

And public spending across the globe, give us confidence in our advertising outlook for the balance of the year, especially with the growing Discovery plus opportunity. We couldn't be more excited to present to our advertisers at this year's upfront on May 18, at a time when our brands and programming have never been stronger or more relevant. At the same time, growth in both domestic and international distribution revenues will be boosted by Discovery plus Net net, we see a healthy inflection in our revenue trajectory behind the global backdrop of improving underlying advertiser demand and continued share gains, particularly in our international markets. Taking a step back and assessing where we are as a company, I'm extraordinarily optimistic. We've gotten off to a great start with Discovery plus exceeding our expectations at and are effectively managing through as dynamic, fluid and exciting a time as I have ever seen in my many years in the media business.

We are encouraged by the engagement and reception to Discovery plus from our consumers, advertisers and distribution partners around the globe, underscoring the strength of our differentiated hand. This is an early tailwind that gives us great confidence as we lean even harder into our pivot. Yet as important as Discovery plus success is to the future prospects of the company, of equivalent importance is our core linear business, the foundation of the company and backbone of our strong free cash flow. As we drive and long term sustainable growth, It is imperative that we nurture both sides of the company as interconnected and supportive to one another. Thank you.

And I'd like to turn the call over to Gunnar, after which JB, Gunnar and I will take Thanks so much.

Speaker 1

Thank you, David, and good morning, everyone. My aim this morning is to provide a slightly more detailed peek into the operating model as well as our near term outlook than we would normally do, in large part given the recent volatility. To the extent that this has created additional questions and or concerns, my goal will be to help alleviate as much of that as possible this morning. 2021 is off to a great start. David just mentioned, in which I'll provide a little more context around, we're seeing strong particularly in The U.

S, where we launched at the beginning of this year, the cross engagement, monetization and churn and implied customer lifetime value continue to reinforce our belief that prioritizing investment in Discovery plus will generate superior returns on capital. As noted, engagement is truly stellar with viewing subs watching roughly three hours of content per day, well ahead of linear and naturally an underlying contributor to both retention and monetization. And retention is indeed looking very encouraging with churn coming in quite a bit lower than we had initially anticipated. While it is still too early to evaluate a stable monthly churn rate, the retention curves of our first subscriber cohorts are looking very encouraging. Based on these early observations, we expect churn to trend towards low single digits over the course of the next twelve months.

Turning to monetization, which is also well ahead of plan. Blended ARPU for Discovery plus in The U. S. Is already in line with our $7 linear chain, buoyed by the strong monetization of the AdLight product, where ARPU has already exceeded $10 in the first quarter. Clearly, strong engagement and watch times, despite offering only a four minute ad mode, are lending themselves to healthy advertiser demand and in turn exceptional CPMs.

Still early days, but we see a notable path for further monetization as we continue to scale and drive additional engagement, attract additional advertisers and brands and roll out new advertising products. Global ARPU is over $5 a week, with international ARPU as expected below that of The U. S. This is in part due to the market price points and in part because we are launching with the greater share of our subscribers coming through promotional partnerships, which drive faster adoption and marketing efficiency, but also come at an initially lower ARPU. That being said, we are in virtually all cases seeing ARPUs that are multiples without the existing wholesale linear pay TVP at which we currently monetize our content.

This, of course, is a core tenet of our international Discovery plus strategy and a great testament to the quality and value of our content in a marketplace not limited by the boundaries of the traditional pay TV ecosystem. Taking these metrics together, we are modeling a much more substantive estimate of customer lifetime value, while subscriber acquisition cost is currently running at a very healthy cushion to that lifetime. Based on these trends, we're increasingly more confident with our outer year projections and our target margin profile of 20% at scale. While it's still too early to formally update this number, we believe there is meaningful upside to the target based on all these initial indicators trending above our business case assumptions. During the first quarter, next generation revenues increased 52% year over year, and we look to build upon this momentum in Q2 with next generation revenues set to more than double year over year, driven by both volume of subs and monetization efforts.

We did invest heavily in marketing spend in the first quarter to support The U. S. Launch of Discovery plus and rebranding of Dplay in key international markets. A sizable portion of which was dedicated to upper funnel brand marketing, build awareness as well as bottom of the funnel performance marketing. This accounted for the vast majority of the year over year increase in OpEx alongside content and text spend.

In the aggregate, next gen AOIBDA losses were roughly $400,000,000 in the first quarter. We expect a modest sequential improvement in next gen losses in Q2 as continued substantial marketing efforts to roll out additional territories and requisite content and tech spend will begin to be offset by more material revenue contributions. Also, we expect to better optimize and refine marketing spend as we gain additional insights. Quarter to quarter losses and quite possibly what ultimately falls into 2021 versus 2022 is still subject to a number of moving pieces. And we will obviously provide as much transparency as possible ahead of such movements, particularly as impacted by rollout plans around the Olympic Games, planned technology spend and platform integrations as determined by specific markets.

That said, we continue to remain confident that 2021 will represent the peak year for losses from our investment initiatives. Of course, we are as mindful as ever about the magnitude of these expenses and their impact on our financials, yet we are reassured by the compelling return metrics against this spend. Now turning to the segments. In The U. S, advertising finished down 4% during the first quarter, in large part due to universe estimates and pub level declines, which ultimately translated into lower impressions across the industry and our networks.

That said, we continued to outperform our Pay TV network peers on share during the quarter. Moreover, pricing remained robust, scatter CPMs developing strongly during Q1 and expected to be up around 30% year over year with roughly 50% premium versus upfront in Q2. In fact, total dollar volume for Q2 scatter will be up considerably versus last year as we see categories such as auto and travel coming back as well as from the influx of B2C companies, including many new to TV advertisers. Discovery plus had started to advertising revenue in Q1 as subscribers grew throughout the quarter, and we expect an increasing tailwind from this component through Q2. As such, we expect U.

S. Advertising revenue to grow in the low double digit range in Q2, helped in part by COVID comps, strong pricing and advertiser demand across the Pay TV ecosystem. U. S. Distribution revenues were up 12% during the quarter, at the high end of our expectations.

Mid single digit linear distribution revenue growth continued to be supported by contractual affiliate fee increases, partially offset by Pay TV subscriber decline. Subscribers to our fully distributed linear declined by 2%, while our total Pay TV subscribers declined by 4%, likely top of peer performance helped by additional network carriage from recent affiliate renewals and continuing share gains at virtual MVPDs, where we remain very well canvassed across all key platforms. In addition to our healthy traditional affiliate business, the launch of Discovery plus and the subsequent ramp up of subscribers accounted for much of the sequential acceleration in distribution revenue growth. During Q2, we expect reported distribution revenue growth will accelerate further, even against a much tougher comparison given the significant onetime benefit recognized last year, implying a significant acceleration on an underlying basis, supported by similar drivers as in Q1. Turning to international networks, which I will discuss as always on a constant currency basis.

Advertising growth grew 8% during the first quarter as all international regions, EMEA, LATAM and APAC, returned to growth, the first since the start of the COVID pandemic. Latin America developed positively, driven by Brazil and Mexico. And despite intermittent lockdowns in certain EMEA markets, we saw mid single digit growth across the region due to continuing share gains in key markets like The U. K, Spain and France. Finally, APAC was also up significantly during the quarter.

In Q2, as we comped the substantial declines faced by the advertising industry last year during the initial stages of the COVID pandemic, we expect international advertising revenue growth to exceed 50%. International distribution revenue was down 2% in Q1 due to lower linear pricing in certain European markets, partially offset by our growing Discovery plus subscriber base. We expect international distribution revenue to accelerate to mid single digit growth during the second quarter, driven by the same factors. As we called out in prior quarters, as we repositioned a number of key international distribution partnerships towards a hybrid type structure, we've opted to trade nearer term upside on the linear portfolio for greater long term support for our D2C efforts. Segment performance has already reflected some of the impact of this over the last few quarters.

Turning to the expense side. Total operating expenses for the consolidated company were up 21% during the quarter. Cost of revenues were up 2%, largely due to the continued ramp in content investment to support our next generation initiatives and the timing of sports content in Europe, partially offset by more efficient content spend in the year. SG and A increased 48% to reflect marketing and branding as well as personnel and technology spend to support our next generation initiatives. As we guided previously, we continue to target low to mid single digit percentage reduction in our core business complex.

Turning to free cash flow. We produced Q1 free cash flow of $179,000,000 with an OIBDA to free cash flow conversion rate similar to the prior year quarter. We remain confident and reassured in our ability to financially support all of our strategic endeavors as we continue to convert AI EBITDA at a highly efficient rate despite the initially significant ramp in our investments. We did not buy back any shares during the quarter. As I noted earlier, we continue to view investments in Discovery plus as the best fundamental use of our free cash flow in order to drive sustainable growth and shareholder value.

Further, for the next few quarters, we also want to maintain an appropriate amount of financial cushion since the cadence of our global Discovery plus rollout remains fluid, both in terms of where and when we launch and the level of investment required to penetrate specific markets. And while we are investing against a rigorous financial framework, bear in mind that we are gearing up for two sets of Olympic Games this summer and in Q1 next year, both of which will be tentpole events for the marketing of our D2C and linear brands. We will, of course, continue to update you on our views on capital allocation as we pursue. We quarter at approximately 3.5x net leverage and needless to say, remain fully committed to our investment grade rating. Turning to a couple of housekeeping items.

Number one, as you may have noticed, we are no longer disclosing adjusted EPS as AEBITDA free cash flow continue to be the key financial metrics in evaluating our operating performance. I will, however, provide you with the PPA impact each quarter as well as point out key noteworthy items to help calculate an adjusted EPS number to the extent helpful. For the first quarter, PPA was $0.32 per share. Number two, we expect FX to have roughly a positive $40,000,000 year over year impact on revenues and around a negative $25,000,000 year over year impact on TEOBIDA in 2021, reflecting the strengthening of the dollar and sterling since the start of the year. We are operating on strong footing, evidenced by a rapidly growing direct to consumer business and a resilient core linear business.

And our ability to convert AOIBDA to free cash flow, where I continue to see at least 50% this year, has never been more valuable given reinvestment demand. We have a self funded business aimed at supporting an immense global direct to consumer opportunity. We couldn't be more excited as a management team to focus on continuing to deliver solid operating performance while we build the framework to support long term sustainable growth and shareholder value. I'd like to turn it over to the operator to start taking questions.

Speaker 0

Your first question comes from Robert Fishman with MoffettNathanson.

Speaker 3

Full year core U. S. Affiliate fee growth after excluding next gen revenues for the full year? And then more broadly, have you seen any pushback from launching Discovery plus in domestic affiliate fee negotiations? And maybe if you can talk to whether the launch of Discovery plus on Xfinity should be viewed as incremental or cannibalistic to your overall partnership with Comcast?

Thank you.

Speaker 1

Okay. So good morning. Let me start with that last question. The we're super excited about the upcoming launches here. As you have seen in our numbers, if you do the math, we've been adding about 1,000,000 subscribers on a monthly basis over the past two months here.

And I do want to point out that these numbers are going to be moving around a little. But the Comcast launch is going to be one very positive event. And to answer your question, I do think there is a significant incremental impact. That's what we've seen with other deals coming online after launch. So that should be a positive.

And we also look at other events happening internationally over the next couple of months that are that could further support the subscriber growth here most importantly obviously as the Olympics coming in internationally. So that's for the subscriber trend here. To your other question on The U. S. Affiliate side, again, as I just laid out, we're super happy with what we're seeing for distribution across the entire ecosystem here, clearly seeing very healthy and accelerating contributions from Discovery plus and our D2C efforts overall.

But we're also looking at a very healthy underlying trend in the core business. You saw the linear subscriber numbers, which have again been a little better than maybe over the average of the past eighteen months or so with only 2% down in our for our core networks. And as I said, we've continued to enjoy roughly mid single digit growth here in the linear part of the ecosystem. The your question about renewals and impact of Discovery plus look, as I said, we are continuing to get fee increases. That's one of the reasons we have been able to continue the growth that we have delivered in the fourth quarter, now in the first quarter.

And we have been seeing very positive discussions for the past renewals and for upcoming renewals as well. As you have heard clearly, Discovery plus is an argument in those discussions, but it's one of many. And to me, it comes back to just the rational cold look at what the economics are. And we are delivering close to 20% of viewership for our affiliates. We're a great partner.

We're leaning in with investments. This company is investing as much in content as never before this year. And we're doing that, and we're making that available to our affiliates at a very, very competitive rate. And so again, don't want to make any predictions here on individual renewals, but those are constructive discussions and we feel that we're in a very good position.

Speaker 2

The only thing I would add to that is outside The U. S, we've been doing real partnership arrangements, whether it be Vodafone or Sky, where it's seen as a real positive. And the fact that Comcast, Brian is a great operator. He's launched us on Flex. We're now going to be launching on X1.

So we really effectively, we have two sides of a terrific partnership. They're getting value in and we're talking to a number of other distributors that will be following on. But it's not cannibalistic at all with Comcast. They're able to create value for us and for them by and I think they have some real entitlement. They're a broadband leader and these channel stores have really developed.

And Comcast is looking in between Flex and X1, it could be a real generator of value for both of us. And as Gunnar said, the share of our traditional channels are going up. They're selling those channels. The cost of those channels are very low. And we're probably the best actor in that space in that we're providing the core value of the bundle.

And we have renewed some deals since we launched Discovery plus and we've done very well.

Speaker 1

And I just realized, forgot to answer part of the question. We're not giving a full year affiliate growth outlook here for all the known reasons. But what I did say a little earlier is the some color on the second quarter. Let me maybe elaborate on that. So again, we delivered 12% in Q1, and I expect an acceleration off of this number.

I'm not getting more specific here because to some extent, it is going to depend on the cadence of subscriber additions on the D2C side because, as I said, that's flowing through now very significantly on the revenue side. But if you keep in mind, last year in Q2, we had a very sizable one off item. So that's going to work against us here. And when I say acceleration from the 12%, I mean despite that one off. So on an underlying basis, we'll see.

This be an underlying high single digit growth quarter, which is going to come through as a sorry, high teens growth quarter, which is going to come through as an acceleration against the 12%.

Speaker 3

Thank you, Beth.

Speaker 0

Your next question comes from Doug Mitchelson with Credit Suisse. Your line is open.

Speaker 1

Thanks so much. Kind of hard to fill in the questions here. I think, David, first for you. How are you balancing content on Go versus Discovery plus How are you and versus the linear networks? And any change in content strategy from what you've seen so far in terms of what people are consuming on Discovery plus I think that's sort of number one.

I think number two, upfront looks like up 15% to 20% for CPMs year over year. It's early. We've got a ways to go, but the setup looks very, very strong. Any thoughts for Discovery and comments on that? And if I could tag on a quick one, ad load at four minutes, when does that start increasing?

Or do you just leave it at four minutes because it's good enough? Thanks so much.

Speaker 2

Thanks, Doug. On the upfront, look, don't know that I've seen 50% increases in CPMs off of a prior year upfront before. CPMs are very high. But what we really have an advantage of is that the broadcasters have been getting $60 plus and we've been getting less than half that. And now all of a sudden, instead of we're booking a we're really making progress in booking significant dollars in the 40s, high 40s, even $50 And part of that has to do with the fact that our share is going up.

We have some hit shows, whether it be mail on Discovery or whether it be shows like ninety Day Fiance, which is number one show on television. And we've started to get paid a lot more money for that. And so I think you will see the our CPMs, I think meaningfully better because we have a lot of headroom still to drive our CPM versus competitors that are that have been at a very high level. So I think we hit this upfront at a very good moment. In addition, we have now some scale inventory on Discovery plus which is selling very well.

And in the in that environment and OnGo, we don't have the disadvantage of it's a viewer is a viewer. So we don't have that inherent disadvantage versus the broadcaster. So we're getting paid on every sub. And we also have a very good demographic, which is generating dramatically higher CPMs than we're seeing in traditional. So overall, I think the advertising market, very, very strong, up front coming up, feeling good about it.

In terms of balancing, the idea that we have viewing subs on Discovery plus spending over three hours and that we have the highest ratings and that our churn is extremely low is telling us a lot about the quality of this product. But what's really interesting is that the top shows, our top original shows and top shows from our channels are only generating about 10% of the viewership. We have a very long tail library about the size of Netflix and people are spending a lot of time with it and a lot of time. So we don't have like the one we don't have the one hit show or the one hit movie. But I think as a result of that, we're seeing much lower churn than our peers and usage that is a lot more.

And that's generating real economics for us on the advertising side, which has surprised us, the kind of economics that we're getting. We will continue to experiment with how we move IP around. We have a lot of originals now on Discovery plus and we have more coming. And we'll be doing that globally in addition to the local content that we have outside The U. S.

JB, maybe you could speak to the balance as we look outside The U. S. For Discovery Plus. I

Speaker 1

mean, look, we are continuing to obviously with all our great local content, we've said it from the beginning, our power outside The U. S. Is this combination of great local IP with universal stories that come from The U. S. Pipeline.

And so we're continuing to lean into that. We are seeing, obviously, a lot of that great content. People and the success we've had to date in the markets, knowing that, obviously, since we launched and started talking about Discovery plus success over the last few months, we've launched in no really new additional markets in the markets we already had. So all that is still to come. And in the markets we already have, with the growth we've seen, it's all been exploitation of the content we are investing in, windowing it in some cases earlier on Discovery plus and then getting a sort of second fund later on either our free to air or our PayNets, and in some cases, obviously, some content exclusively on Discovery plus And that combination of content mix is working extremely well for us and is one that we're continuing to look at the data and the response of the consumer and continue to modify and adjust as necessary.

The only other thing I'd say, Dave, to the question also about four minutes of advertising, we obviously market the service as five. And so we came out with a lower ad load than even what we marketed. We're going to continue to stay at that level for now. But that actually, over time, when we think it's appropriate, which we don't have any plans to do that for the minute. But down the road, we obviously have some flexibility to move above the four minutes if we need.

And Doug, maybe if I can just add to that. It's an upside. But right now, I mean, the trends are so overwhelmingly positive. I mean, we have so much opportunity without having to fiddle with the consumer experience here, right? As we said, we're already tracking North Of 10 Dollars ARPU for that AdLite product.

And as you would imagine, there's been a positive trend over the course of the quarter as we have sort of fired up the subscriber base and attracted more advertisers into the product. So there is an underlying positive dynamic. But if you just take a step back here, why are we so excited Number one, we've ceased to just sell commercial demo. It's a big difference between the linear TV and our digital platform here.

We're selling every single eyeball on Discovery plus and TV everywhere for that matter. Number two is we've got a really level playing field here. That big gap between broadband and cable CPMs that we've been discussing for and seeing for decades here just doesn't exist. It's premium online video, and we're getting full value for our products. Not only that, we have a highly engaged audience.

You heard some of the stats that we mentioned that are probably top of the industry, very family friendly content environment. Couple that with the fact that premium online video inventory is scarce in the first place because a lot of the viewership is happening on ad free platforms that drives super high demand and a hot market environment right now. The other thing that I want to make the other point I want to make here in terms of upsides is we're still in the early innings from the perspective of our product offerings towards advertisers, right? We have just launched our binge advertising products, Pause ads. We're working on more and it's in a way, it's part of the prioritization exercise here to get all those features online.

But there are a couple of great other ideas. So I do think that we will without even playing with the number of minutes here, we will have a pretty positive run rate here for ARPU over the next couple of months. All right. Thank you all very much.

Speaker 0

Your next question comes from Katya Mairo with RBC Capital Markets. Your line is open.

Speaker 1

Good morning. Thank you for taking the questions. Two, if I could. First, on the international pay TV ecosystem, one of your peers recently announced plans to shutter a number of its networks across parts of Asia to focus even more on DTC. On your end, you refresh us on what linear pay TV subscriber trends you're seeing across your larger international markets?

And ultimately, your comfort level in the sustainability of those trends compared to perhaps maybe more drastically pivoting towards streaming? And then I have a follow-up. On the international question, in terms of pay TV universe, we're continuing to see a kind of stable to up slightly universe across the world. We have seen which we've been seeing actually for years, it's not necessarily a new trend. Unlike The U.

S, we have seen more of a churn down from some of the higher end tiers, but less more of a cord shaving in a few markets and less than much less of a cord cutting. And so universe wise, we feel like it continues to be fairly stable. There are still I mean, again, it's hard to talk about the international markets in a broad strokes, but there are select markets which are seeing obviously more challenges. Brazil has been one where we've seen more subscriber decline as the middle class there has been hit harder over the last few years. But overall, the universe remains fairly stable.

And the outlook for us continues to be that it will remain pretty stable with, again, some pockets of different markets moving in different directions, but net net reasonable stability with some continued churn down from the higher, more broadly packaged tiers down to a slightly lower price tiers in some markets. And I think as it relates to the Disney news about their shuttering of the Asian channels, look, I think we've obviously leaned in, not to say we have shut full portfolios of channels, but as we've talked to you before, selectively in markets where we think the long term opportunity of what is possible with Discovery plus and the ARPUs that Gunnar and David talked to, where there's an advantage there, we've leaned into that in select markets like we've talked to you about in Denmark and other places. And we'll continue to look at that. As Discovery Plus rolls out in more markets internationally, obviously, that opportunity will become more real and is something we'll evaluate on a case by case and a market by market basis.

Speaker 2

But for us, the market feels right now very strong for us. We're growing both our ad revenue and affiliate revenue. Our ad revenue is growing dramatically, but it also gives us a relationship with every distributor. And what we're able to do is provide a value to the distributor in the bundle, where in many cases Pay TV is only 20%, 30% penetrated. And then they're super with us on Discovery plus and saying, let's reach the rest of the universe.

So the markets tend to look very different. And so the idea of supporting us with Discovery plus and on our traditional platform is something that just has a lot of symmetry outside The U. S. Plus we have the ability to promote on our platforms. So and we have a massive library.

So for us right now, having this generating a lot of free cash flow and growth in our traditional, maintaining and strengthening our existing relationships. And they need they don't want the channel stores to take all the business. So they're coming to us and saying Discovery plus is terrific. That's good for us, it's good for you. How do we help?

And that's whether it's the mobile players or the broadband players. So for us, we think we can play it's an advantage for us.

Speaker 1

That's

Speaker 2

great. Have 10 to 12 channels in each country. So the scale is bigger.

Speaker 1

That's great. And if I could for Gunnar, I want to just make maybe take a step back from the quarter and ask about the OIBDA outlook over the next few years. Obviously, 2020 took a hit with COVID. And this year, we're seeing peak DTC investments as well as Olympics weighing on profitability. Looking ahead, though, the DTC losses ease, Olympics losses get better in 2022 and then in 2023.

And of course, hopefully through all this, we'll hopefully see a recovery in linear ad trends and revenue as well. I'm of course not expecting specific guidance, but can you just help us think through any high level puts and takes as we think about what seems like a very favorable setup? Well, I think you've just done that. I think those are the right building blocks. And look, I mean, just give me a little more color.

As I said before, we have stayed away from giving you very specific guidance to breakeven, etcetera. I continue to be super, super happy with the metrics that we're seeing for D plus And as I said a minute ago, in December, we put out there this 20% margin bogey for sort of the D plus business at scale. That's looking incredibly conservative based on what we're seeing right now. I mean, let me just sort of take a step back here. Go to pay numbers, which are top of the industry.

Churn rate and again, I want to be careful here because it's so early days, but the cohort numbers are looking extremely compelling. And we're doing better on ARPU than we originally modeled. Take those three together, that just leads to a customer lifetime value estimate right now. And I want to be specific, it's still an estimate, but it's significantly better than what we had in mind when we gave that number in December. At the same time, we're acquiring these subs at pretty efficient subscriber acquisition costs.

In fact, a lot of the loss that we're looking at here for start up investments in the quarter is essentially the vast majority of this is just marketing driven. And you would assume some efficiency as the product becomes grows in awareness, as we start getting more word-of-mouth, etcetera. And as we're benefiting from the high retention that we're seeing in these in our subscriber base. So taking all that together, again, it's just too early to start talking about sort of an updated margin profile for three, four, five years out, but we feel very, very good about it. And to this point about breakeven, again, as we said before, it's not a metric we manage towards.

As long as I can acquire subscribers here with phenomenal lifetime values at a fraction of that a fraction of cost of that lifetime value, we'll do it. And we also stand by what we said earlier. I don't think anyone is going to have the margins that we will have in this business. And I think we're going to get there much or get to breakeven or scaled margins much earlier than anyone else just because our fundamental underlying economics are not changing. We're getting the same value from the consumer and we're getting the same leverage out of our content.

We continue to be in super efficient verticals that we're super strong in and that we have thirty years of experience in. And we continue to exploit our content across platforms and across the entire globe. And it's amazing to see how this model again, it's early days, but how it's working. We're getting phenomenal cross pollination between our TV Everywhere environment and Discovery plus It's great. We'll just have to that's why I decided to give you a couple more KPIs, so you can all sort of make up your minds and think about it how does it compare to what you're hearing from others, what does the model look like and we'll just keep giving you some transparency here and take it from there rather than giving you a long term five year outlook or so.

That's great. Thank you all.

Speaker 0

Your next question comes from Alexia Quadrani with JPMorgan. Your line is open. Thank you. Can you just please elaborate a little bit more on the demo of the typical consumer and your Discovery plus It sounds like you're skewing favorably toward the demo that advertisers are particularly excited about reaching. And I'm wondering if given your outside success in the Ad Lite option, if you're skewing your promotional activity more toward that option versus the ad free?

And then my second question is just really on the moderation of linear sub decline that we've seen, you've got such great insight into the industry. And I'm curious, I know you got a crystal ball, but I'm curious if you think what's really been driving it and how sustainable it is?

Speaker 2

Sure. Thanks, Alexia. It's a lot younger, more than about fifteen years younger. And it's also about half of people that have cable and about half of people that don't have cable. And the advertisers are and also with the length of view so high and the engagement so high, we've been doing extremely well.

To your point, we look at AdLite as kind of a breakout hit. Here we are trending right now well over $10 And as we get bigger, it's continuing to grow and we have this strong demo. So we look at ad lite as something that as we look at ad free versus ad lite, we've been talking to those customers and at four minutes an hour, they seem very happy. The ad free are very happy, but we don't really see a difference. And the ability to generate significant incremental economics off of the ad lite.

So you'll see us pushing on ad lite. And when in the ad free, which was very inexpensive as we were going to be rolling it out outside The U. S, the ability to do an ad lite outside The U. S, JB and I, after seeing this data immediately two months ago were wow. And so we've been pivoting because there could be upwards of 50% incremental revenue.

And as we get the scale more than that by doing the Ad Lite and you have a very good customer experience, so which was a surprise to us. We really thought people are used to commercials, they're not going to want any, but it's one of the reasons we're not going to five. They're so happy with the four and we're getting such a premium for it and it's working so well, we're just going to ride it.

Speaker 1

And Alexia, maybe on your other question, the moderation of stop losses in linear, I wouldn't want to comment on the overall industry trend. Just keep in mind, our better number here is very much a Discovery specific result. It's just we're getting additional carriage in some of the renewals of last year, and that's helped us. And we obviously continue to be among the best distributors across the virtual MVPD space. So that's been those two have been the helpers.

Speaker 2

And for most of our core services, for all of our core services, we have very protected carriage as well. So the ability to one, I don't think they would want to do anything to us, but we have very protected carriage in terms of being on the tiers, not being able to be moved around at all. So you should continue to see us by the very nature of our agreements be at the very top. And the fact that they could add our channels to tiers to drive viewership, which we've seen in some of our newer deals that we might we'll probably do better.

Speaker 0

Your next question comes from Rich Greenfield with LightShed Partners.

Speaker 4

David, I think you said earlier that Discover plus users are spending three hours per day. That would be yes, can you hear me?

Speaker 3

Yes. Now we can.

Speaker 1

Sorry, So don't know what

Speaker 4

David, I think you said before a couple of times that time spent per Discovery plus users like three hours plus per day. That would be like 50% higher than Netflix and I think maybe 15x higher than Peacock daily usage. Just want to make sure, is that across the mean is looking at 15,000,000 subscribers and saying they're averaging three hours per day? Or is that some subset of the 15,000,000? And then I have a follow-up on ad sales.

I think when you were talking about, at least in the release, you were talking about how sort of the reach of the pay TV universe had an impact on ad sales. Could you just maybe explain what's happening in terms of is the shrinking pay TV universe pushing more towards things like Discovery plus and digital? What exactly was the reason of that comment? And how do you think that comment plays out over the coming twelve to twenty four months?

Speaker 1

Okay. You, Rich. Let me clarify that. The three hours per day are per viewing sub, so not per average sub. And you can assume that we have about close to 50% active subscriber base on a daily basis.

So that's how you need to interpret that number. Again, I think you're right, though. It's a great statistic across the ecosystem and we're super excited about it. The point about the universe shrinking, it's just I mean, as I laid out, we gained share, by the way, domestically and internationally across the first quarter. And the viewing trends though for the entire pay TV ecosystem in the first quarter just have been tough.

I mean, we've seen universe estimates declines and people using television. Thing is

Speaker 2

that we were up significantly during the pandemic and we were able to produce content and we were really able to grow share pretty significantly everywhere in the world. Some of our channels like TLC and Discovery and HGTV, they don't have the same cycle that scripted does, but we weren't able to produce a lot of content for those. We're now back to about 90% or 95% and you'll be seeing more of our fresh content coming in. So one, I think on a CAGR basis, we look different than everybody because we were up meaningfully during this period. But two, we're going to have more content because it took us a little while with some of the fixer offers that we go to that we were we had some of the impact of the pandemic.

But we're now 90 plus back and you'll see more fresh content. And I think we'll continue to gain share and outperform.

Speaker 4

And David, just because as a kind of a big picture question for you, as you think about where to put content, you're producing lots of it and you said you're now back to like full capacity. How do you and the team decide what goes digital first to Discovery plus versus what goes to the linear networks? And how are you making those decisions? And is it changing already?

Speaker 2

Look, we're learning a lot. We had a ton of originals and we could see what's working, what kind of content people are watching. We have it's pretty fluid. We have higher production values. We spent a little bit more star power on Discovery plus We're trying to figure out what is the plus.

Fixer Upper, we didn't and Chip and Joe, we haven't put anywhere except for Discovery plus That was a big helper to us. The BBC content will only be on Discovery plus We're experimenting with we put a ninety day series on that only went on Discovery plus and it drove a lot of subscribers viewership. And then those viewers are watching our whole ninety day library with over one hundred and fifty hours of original on there. So we're trying to and then at some point that we put that back on some of that content back, that's what we're trying to figure out right now. But we've been able to feed the growth.

As Gunnar said, we're seeing some steady and strong growth on Discovery plus and we're really focused on growing internationally where JV is taking it out. And internationally, it's a little bit of a different story because we're local and sport. But JB, why don't you talk a little bit about the international piece of that balance?

Speaker 1

Yes. I think, Rich, the other thing that's unique, and as David and Gunnar talked about before, is the cost efficiency of our model for most of our production makes it such that we don't have as much of the eitheror. You've got a window here or you've got only window here. And so the exclusivity that you do exist in scripted, which for the price tag, can only do one or the other. I think we have a very balanced and smart approach, which is we are for franchises and talent that are known to our linear brands, we continue to make sure that we're nurturing those audiences.

And selectively, and particularly as David said, we're experimenting in different ways to try and see what the data tells us. We're experimenting with some early windows or pulling having a talent that's been doing stuff on linear, do some additional stuff for us on D2C. But it's we can do a little bit of both. It's continue to produce great originals and stories for our traditional television and give people an ability to who want to access that and who aren't subscribing to it on in the bigger bundles, access to it on B plus either concurrently or even a bit later in some cases. And at the same time, invest in some originals for Discovery plus that are unique, new IP, new faces, new talent, new stories, edgier stories in some cases than what we could do on linear traditionally and without breaking the bank on content budgets.

And so it's a really it's another strength of our unique content model that doesn't make it such an eitheror, and we're continuing to experiment with some of the windows and see what the data tells us.

Speaker 2

The only point I would add is the reason I talked about in my comments about Italy is 80% of that country, all of our content is new to them. So as you look across Europe and Latin America, even though we have a very successful pay and business, that we have a huge library having been in these markets locally for fifteen, twenty years that we could now go to an offering at a very low price and be available to 80 of the country that didn't have access to us before. So here of how do we window it and how do we move it back and forth is a very different question when you're going into a country that's 20% or 30% penetration. And it's now new to the overwhelming majority of the population. They've heard of it.

They've heard of it. They have good feeling about it, but maybe they couldn't afford to buy it or they want it on a different device. But it's a different calculation.

Speaker 1

But David, it's also it's most extreme in some of those international territories. But to some extent, we see the same here domestically. As we laid out, we're for the first time, we're now targeting 30,000,000 homes that don't have a cable subscription anymore. We're getting a significant number of additional viewers in here that are generating revenue at the same or better ARPU. And that allows us to invest behind this.

And that investment over a couple of months or next year maybe is going to raise all boats because we're just creating more of what we're best at, which is our global unencumbered, 100 owned high quality IP.

Speaker 0

Okay. And your next question comes from Brandon Nussel with KeyBanc. Your line is open.

Speaker 1

Hey, thank you for taking the question. Gunnar, I was hoping you could talk more about the retention curves that you're seeing thus far for the cohort of customers. Are you seeing retentions after the first month of greater, less than 90%? Maybe just some more color there would be helpful. Thank you.

Yes. Look, as I said before, we are very, very encouraged by those retention curves. We are seeing more than 90% retention. We're starting one step earlier, very, very strong role to pay of north of 80% after the seven day free trial, I'm talking U. S.

Here, and then greater than 90% retention in the first month and then a very, very significant drop off in sort of cohort churn. So again, it's way too early to talk about sort of a stable long term churn rate here, but the numbers are off the charts compared with what we expected. And also frankly based on the intel that we have been able to pull together here, I think they're also stacking up very, very nicely against competitive offerings. Again, it's early days. I always want to disclaim that, but we could not be happier.

And I think it makes sense if you look at the length of tune that we've always been seeing with our viewership in Meniere as well. We're essentially seeing the same behaviors here in the B2C world. Then on long term churn expectations, where do you think you fall? You said low single digit, but is that 2% to 3%? Or is that more of a 4% number?

Well, look, let's as I said, it would be speculation right now. I think we're going to do very, very well compared with even the leading players in the industry.

Speaker 2

It's tough for us to take one month or two months or three months and say, this is where it's going to be forever. The numbers are very good and we are in the low single. And we'll see over the even if we think it's trending down, if we think that that may change over the next couple of months for the good or the bad. But right now, by every measure, the churn is significantly lower than we expected. And it's one of the reasons why we're leaning into it, not just the length of view, but the very low churn and how happy people seem to be with the product.

Speaker 1

And I mean, again, what we're looking at right now is really that estimating customer lifetime value up very, very significantly compared with what we put in our initial business case that was the foundation of what we presented in December and how that relates to subscriber acquisition costs. Clearly, if we're looking at our numbers here, I have to greenlight a lot of marketing spend in the first quarter and I was very, very happy to do it because we're just looking at even the revenue contributions over the balance of the year. It's just an amazing return on investment by any measure. Thanks for taking the questions. Thanks, Brian.

Speaker 0

Your last question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Speaker 3

Thanks. Good morning, everybody. Gunnar, I was

Speaker 2

wondering if you could talk a little bit about how you guys think about the D2C business in the context of the overall business. In other words, do you think about this as a single P and L? Because it's very tempting on our side to hear sort of the $1,000,000,000 drag on EBITDA and the path to breakeven as suggesting some pretty substantial EBITDA growth for the company over the next several years. I'm wondering if you can talk a little bit about how you think about managing the business particularly on the content and marketing front. Our expectations are sort of in the right place if that makes sense.

Speaker 1

Sure. I mean the question is spot on Ben because I mean we are fact of the matter is we're looking at two at least revenue streams here now that have fundamentally different financial profile. So the idea would be indeed tempting to say, okay, we have a digital business and a linear business. This is not a reality right now and maybe less so for us than for others just because we have that amazing IP exploitation model. One of the big advantages that we have is our ability to take so many bites at the apple across the global footprint and across platforms.

So that's why right now it is a little hard to really cleanly split out a digital P and L and a linear P and L. And frankly, it's also not entirely in line with how we manage the company because JB and his team are very much looking at international markets in an aggregate basis. And some of the trade off decisions that we've laid out are very much focusing on trading off linear and digital. That being said, we will try to make it as easy as possible for you guys to form a view. And look, by laying out the metrics here for our Discovery plus product, by giving you a perspective on losses that we have incurred from launching and by giving you at least a short term outlook about how we expect those losses to be trending, we're trying to help you model this.

And as I said earlier, I would assume those start up losses to start tapering a little bit in the second quarter. Again, I also want to have the flexibility to lean in further if we find other markets are coming online that have a great opportunity to acquire subs at a multiple of their acquisition costs. So we'll need some wiggle room here, but I'm trying to sort of give you an understanding of that financial profile. And as I said, I mean, I am focused on long term sustainable growth for this company. I think that's what's going to drive shareholder value.

And I mean, if you just look at our guidance here for the second quarter, accelerating U. S. Distribution revenues from 12% against a tough comp, double digit U. S. Ad sales growth, 50% international ad sales growth and significant acceleration in international distribution growth to mid single digits.

I think again, it's early days, but I would say it's working.

Speaker 3

Yes. And we appreciate the disclosure. Thanks answer.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.