Warner Bros. Discovery - Earnings Call - Q2 2021

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Incorporated Second Quarter twenty twenty one Earnings Conference Call. At this time, all participants 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

Good morning, everyone. Thank you for joining us for Discovery's Q2 earnings call. Joining me today are David Zaslov, President and Chief Executive Officer Gunnar Videnfels, Chief Financial Officer and JB Parekh, President and CEO, Discovery Networks International. You should have received 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 will open the call to take questions.

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 company's future business plans, prospects and financial performance as well as statements concerning the expected timing, completion and effects of a previously announced transaction between the company and AT and T relating to the WarnerMedia business. These statements are made based on management's current knowledge and assumptions about future events and about 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 for our second quarter earnings call. Discovery continues to deliver strong operating and financial performance, driven by healthy momentum across all our key segments, beginning with our core linear business, which continues to accelerate sequentially, underscoring the durability of our content categories and the overall strength of our brands, while simultaneously scaling our global streaming offerings, most importantly, Discovery plus which continues to have strong traction, underpinning total next generation revenue growth of 130% year over year and 17,000,000 total global paying direct to consumer subscribers at the end of the second quarter and 18,000,000 as of today, with momentum around the globe, most notably behind the strength of the Olympics, which we've launched on Discovery plus in Europe in a number of markets, or the Eurosport player where Discovery plus has yet to launch. And we've had some fantastic traction thus far. We are excited about prospects for the second half of the year as well as for the Beijing Olympics. More on all of that in a moment.

The combination of continued strong execution across our core business while scaling our streaming platforms drove healthy top line growth and strong OIBDA and free cash flow conversion supported by vigilance on costs. Gunnar and his team continue to do a terrific job leading transformation across the organization with an eye toward continued efficiency, particularly as we absorb investment spend to support the growth and rollout of Discovery plus And we delivered a meaningful sequential improvement in our investment losses as we lean into monetization and begin to see the benefits of scale from an expense base. In fact, this quarter annualized next generation revenue is $1,600,000,000 and we see additional revenue growth ahead. In terms of the core, as you've heard from our peers, the industry just wrapped an incredibly healthy upfront, providing us with a level of visibility we have not seen in quite some time. John Steinlauf and his team delivered top of peer performance and a record for our company, a testament to the programming and brand that viewers love, and that our advertising partners value as well as our differentiated suite of products and platforms available to reach consumers in an otherwise increasingly fragmented marketplace.

We achieved rates of change inclusive of the stepped up performance at Discovery Premier that were well ahead of the peer group. Premier has proved to be a great success, a unique vehicle that packages first run episodes from our most popular series of networks in which sales more than doubled. Over 200 clients are now buying Premier. They enjoy ratings and reach that is equivalent or greater than broadcast prime, but at a significant CPM discount. You've heard me tout this as a true win win, and we keep driving this forward and clients love it.

Moreover, demand for our bouquet of digital properties across Discovery plus our Go apps, VOD, and Sites and Social was robust. Advertisers continue to look for incremental reach beyond linear. And with roughly half of the audience base for Discovery plus being non cabled households, the platform is hugely attractive to buyers. We look forward to additional product features and offerings to roll out throughout the year to drive further monetization. But what we are currently seeing is noteworthy.

Advertisers are buying targeting capabilities of our platform with innovative and intelligent solutions and healthy premiums to traditional linear. Internationally, advertising has also come back in a big way, driven by a number of key markets such as The UK, Italy, Germany, Poland, as well as a number of LatAm and APAC markets that resulted in all regions around the globe turning in an acceleration in traction throughout the quarter. Turning to Discovery plus we are really pleased with the cadence and monetization of the service, supported by continued subscriber traction and healthy ARPU, notwithstanding the seasonally slower summer period, only exacerbated by the post COVID reopening. That said, we had healthy sequential improvement in paid subs quarter over quarter with most of Discovery plus international runway still ahead. Here in The U.

S, we continue to add to our distribution and platform footprint. Following last quarter's launch with Comcast, in the coming months, Discovery plus will also be available to comp subscribers across their Contour TV and Contour StreamPlayer platforms. Discovery plus will also shortly be available on VIZIO SmartCast, advancing our rollout to all major consumer platforms. As we've noted previously, the bulk of the 2021 Discovery plus international market launches would be in the second half of this year with key market launches such as Brazil, Canada and The Philippines to come in the second half of the year. Vodafone successfully launched in July in The UK market for mobile customers, and we expect additional markets such as Spain, The Netherlands and Italy to launch as planned following the migration of our front end technology to our common global platform this fall.

JB and his team have been deliberate and methodical in managing our international rollout to ensure the best consumer experience. This includes ensuring we have strong integrations with local partners and completing a major replatforming to get both our front end and back technologies on one common platform. It is a complicated road map of engineering and commercial logistics, not to mention COVID challenges around the globe in some of our tech hubs. At the same time that we have been planning, producing, and delivering the Olympic Games from Tokyo.

Speaker 3

We continue to learn a

Speaker 2

lot as we go in terms of what's working and what's not, with respect to marketing, branding, tech product and features, as well as distribution partners and platforms. We are very pleased with the metrics we look at to evaluate our position within the marketplace, consumer acceptance, role to pay, viewing time per active subscriber, churn, monetization, and so on. We provided an early glimpse across these metrics last quarter, and I'm pleased that we continue to track well against our internal plans and the momentum we are building as we look ahead to our exciting plans post merger with WarnerMedia and HBO. Taken together, we could not be more excited about possibilities ahead to serve consumers with the deepest and most compelling content offering in the world. Consumers want choice and simplicity.

We believe that the combined company will be able to offer more of both. In a video market that could see more consumer selectivity as the market matures, we believe the combined company will be well positioned to compete in the global streaming marketplace. The regulatory process continues to move forward as planned, giving us confidence in our previously stated time frame of mid next year to close. And lastly, the Olympic Games in Tokyo, which as I noted earlier has been a very pleasant surprise during what can only be described as challenging circumstances. At this point, about halfway through, we've already doubled our total sub games from the last Olympic Games in PyeongChang with nearly three quarter of a billion minutes of Olympic content streamed, up over 18 times versus the last games.

Like with the winter games, we've enjoyed some truly remarkable viewing shares in key markets, like The Nordics, in which our share of television viewing for certain sports has been upwards of 60% to 80% and with outstanding traction with streaming across all markets, notably in The UK and Italy, which are newly launched markets for Discovery plus We are very excited about the upcoming Olympic Games in Beijing in early twenty twenty two and then, of course, Paris in 2024, right in our backyard. These are truly hallmark, high value branding events and are super funnels that drive awareness, viewing and subscribers to our platforms. With that, I'd like to turn it over to Gunnar to take you through our financials, after which Gunnar, JB and I look forward to taking your questions.

Speaker 4

Thank you, David, and good morning, everyone. Thank you for joining us today for our second quarter earnings call. Echoing David's comments, I am very pleased with our operating performance this quarter, in which both our traditional core linear business, alongside of our next generation streaming platforms, combined to deliver very healthy revenue growth and impressive pay over debt and free cash flow conversion. While comparisons against last year's advertising performance were very favorable, we are especially encouraged by the acceleration and sequential improvements we've enjoyed from every region around the globe and return to near pre pandemic levels. The US, Latin America, EMEA, and Asia Pacific all turned in impressive results.

And, of course, Discovery plus is providing a nice tailwind to our performance. Turning to second quarter results, beginning with The US segment. Advertising revenues increased 12% year over year as we continue to take advantage of a very robust advertising market for both linear and digital inventory. We saw strong demand in all key categories including CPG, pharma, cosmetics, auto, retail, and home improvement, far more than offsetting the software viewership across the industry as compared to the peak COVID q two of last year. Scatter CPMs were up 50% plus versus last year's upfront and up more than 30% year over year.

Additionally, next generation advertising demand was very healthy across our suite of products with revenues up 70% year over year. Specifically for Discovery Plus, more than 800 advertisers have now bought inventory on the platform more than four times the number of advertisers that we had targeted by the end of the second quarter. Interestingly, more than 90% of all clients who have bought inventory on Discovery plus also bought inventory on our Go and TV Everywhere offering, underscoring the power of integrated audience solutions across our suite of digital products. Furthermore, we continue to roll out new ad products on Discovery plus. For example, we recently launched GreenLive, an ad product that allows clients to own the first ad served to every user on Discovery plus on a specific day.

As noted earlier, the strength of the upfront market underpins the continued relevance and importance of television as an advertising medium, contributing to greater confidence in our ability to drive top line advertising revenue growth. While we face comparisons against political advertising in the second half of the year and some modest headwinds from the Olympics here in The US in q three, layering in the tailwind from this upfront, we should enjoy sequentially faster revenue growth in q four over q three. Distribution revenues grew 12% year over year on a reported basis or 18% like for like, primarily driven by continued traction and monetization of the Discovery plus subscriber base, helped by linear affiliate pricing, offsetting the year over year decline in PayTV subscribers. Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio subscribers were down 7%. However, recall that we sold Great American Country during the quarter.

When adjusted for this sale, total portfolio subscribers would have been down 3% year over year during the quarter as we continue to benefit from specific distribution gains across certain networks from recent renewals. We will begin lapping those renewals in the coming months, and you should expect to see our linear subscriber trends more in line with the industry going forward as we have discussed prior. Worth noting also is that the sale of GAC did result in a modest headwind to both reported advertising and distribution revenue this quarter as we did not recognize any contribution for the quarter. Turning to the international segment, which I will, as always, discuss on an ex FX basis. Advertising revenues increased 70% year over year as we saw significant growth off the second quarter last year.

We saw strong revenue growth across all regions with the pace accelerating throughout the quarter with a number of key markets nicely above 02/2019, as David mentioned. Distribution revenues increased 6% versus the prior year, supported primarily by direct to consumer subscriber growth. Though as noted, there were no material new market launches during the quarter. This was partially offset by lower linear affiliate rates in certain European markets. Total company operating expenses increased 33% during the quarter.

Cost of revenues increased 25% year over year as sports returned to a more normalized schedule this year versus virtually no sports last year due to COVID related shutdowns. As well as the continuing investment in b to c content. SG and A increased 43% versus the prior year as we invested marketing and personnel to support our Discovery plus rollout. We continue to focus on driving efficiency in our core linear networks, and we remain on track to reduce core linear OpEx in the low to mid single digit percentage range for the year. As we guided, we reduced our losses from investment projects significantly in the second quarter to roughly $250,000,000 worth more than $400,000,000 in the first quarter, benefiting from both strong next generation revenue growth as well as more efficient marketing spend primarily in The US.

Q2 next generation revenue growth of 130% is annualizing at a $1,600,000,000 run rate, and we expect additional sequential quarterly revenue growth through the year and beyond. As we launch new markets during the second half of the year, we expect that we will continue to incur investment losses, though more or less in the same ballpark as this past quarter, mainly driven by content and marketing costs. We continue to expect that investment losses will peak this year. Overall, we remain very pleased with all of the core KPIs we closely monitor, and we continue to track well against our internal plans. Global direct to consumer ARPU remains consistent with Q1 as the impact of certain international distribution partnerships and associated early promotional activity is offset by our strong and growing U.

S. ARPU, which is nicely supported by the AdLive Discovery plus product. Role to pay still remains high at an average of close to 80% across the global DTC portfolio, as is average engagement per viewing subscriber, which is more or less in line with what we saw last quarter. As well, we remain pleased with overall churn, which naturally is at the lower end for the most mature subscriber cohorts and skews higher for the most recent one. As I noted, the vast majority of our international Discovery plus growth thus far has come from existing markets.

And we plan to launch a number of key markets and territories during the second half of this year, including Brazil, Canada, and The Philippines, alongside additional Vodafone markets in Italy, The Netherlands, and Spain around the end of the year. It is worth highlighting that a handful of these market launches have been extended out about a quarter or so later than our original internal plans called for, primarily resulting from the requisite harmonization of our technology platforms, the added benefit of which will enable us to roll out an international and light product. This has been a heavy lift, particularly given team constraints related to COVID in our tech hubs, primarily in India. Other puts and takes to consider will be our ability to maintain and keep subscribers that come in during the Olympic games, though the initial role to pay numbers was very encouraging. Net net, we remain very excited about our local go to market strategies across these important countries through the end of the year.

Turning to housekeeping items. Net income for the quarter point was $672,000,000 or 1.01 per share on a diluted basis.

Speaker 0

First, please note we recognized a

Speaker 4

$9 per share gain on the sale of American country as well as a 9¢ per share non cash gain on an existing investment in Sharecare, the company that recently went public. Second, our effective tax rate during the quarter was negligible as we recognized certain non cash tax benefits totaling $162,000,000 or $0.24 per share. Given these tax benefits, we now expect the full year effective book tax rate to be in the mid teens range. For cash taxes, we are now anticipating a slightly higher rate in the high 20% range for the year, excluding PPA amortization, as we are positioning our tax footprint for optimal outcomes across a number of legislative scenarios for 2022 and beyond. Third and finally, the PPA impact was 30¢ per share.

Adjusted for the above, EPS would have been 89¢ per diluted share. Now turning to free cash flow and our leverage. We generated $757,000,000 of free cash flow in the quarter, representing a near 70% conversion rate of AOIBDA notwithstanding the continued investments we are making as well as the return to normalized content production levels. Year to date, our AOIBDA to free cash flow conversion rate is nearly 50% and we remain confident that we will convert at least 50% of our AOIBDA to free cash flow this year, even with the anticipated new market launches and slightly higher cash taxes mentioned earlier. At the end of the quarter, our net leverage was 3.25 times, which is within our current target range.

We expect our net leverage could be temporarily at the high end of our target range due to the Olympics in the current quarter. As a reminder, we do expect to recognize the 175,000,000 to $200,000,000 of AOIBDA losses during the third quarter as a result of the Olympics. So we continue to expect that we will break even or generate slightly positive AOIBDA and free cash flow over the life of the deal. As indicated when we announced our transaction with WarnerMedia, we did not repurchase any shares during the quarter as we continue to invest in our next generation initiatives and conserve cash ahead of the closing of the deal. And finally, we now expect FX to have roughly a positive $100,000,000 year over year impact on revenue and a negative $20,000,000 impact on AOIBDA in 2021.

We continue to operate on solid footing, dynamically growing our direct to consumer business with contributions to our top line growth becoming increasingly meaningful and optimizing the resilient core linear business, creating strong conversion of AEBITDA to free cash flow. We remain focused on delivering solid operating performance while we build the framework to support long term sustainable growth and shareholder value. And we are eager and excited once we gain all the requisite approvals to roll up our sleeves to capture the tremendous opportunities offered by our proposed merger with WarnerMedia. And of course, we look forward to speaking with you at the appropriate time on our thoughts and plans around integration, strategic direction, synergy, etcetera. With that, I'd like to turn it back to the operator to take your questions.

Speaker 0

Your first question comes from Kot kan Meral with RBC Capital Markets. Your line is open.

Speaker 5

Good morning and thanks for taking the questions. Just on direct to consumer, can you help us better understand the international rollout trajectory? I know you called out Brazil, Canada, Philippines and a few European markets with Vodafone for the back half of this year. Some of these are particularly big broadband and mobile markets. I'd be curious which market launches or distribution partnerships you see as the biggest opportunities?

And maybe more broadly, how are you thinking about the subscriber momentum into the back half of this year? Especially, I think there's some concern that we might see some churn pick up

Speaker 3

these

Speaker 5

distribution partnerships that had six month promos. And then just lastly, I know it's early, but any thoughts on the international rollout looking to 2022? Thank you.

Speaker 6

Shibby? Yeah. So we have as we as you noted, we have the markets we've announced that we'll be rolling out. I think we feel, very good about them. When we announce when we get closer to the actual release date, will also be announcing in many of the markets as we've done to date, both in The US as well as internationally, partners

Speaker 1

that we'll

Speaker 6

be launching with, which you should expect sort of fairly consistent to what our historical precedent has been, some strong partnerships in a few of those markets that we roll out. And so we feel good about that. I think as Gunnar touched on in his comments, are those are sort of leaning towards more sort of September and into the fourth quarter, where we had hoped obviously to be slightly more ahead of that into the third quarter. But due to, obviously, wanting to make sure we got the Olympic Games off the ground successfully and getting this replatforming completed, some of that will hit a little bit later in the second half of the year than we initially thought. And in that time period, I think we do see internationally some, you know, obviously we're expecting significantly more growth coming out of those new market launches as we get towards the back half of the year.

As it relates to 'twenty two, I think it's a little bit early to talk about that. The only comment which David and Gunnar made amplify is, obviously, we get later into 2022, when we get further visibility on the timing of the WarnerMedia deal, we obviously will look at making sure we stay smart in the context of when that timing and when that deal might close, as to how we maximize, the rollout schedule, of those services into 2022. So, that's, think, you know, as much as I know, Gunnar or David, if you want to add anything else, that's as much as Just to add,

Speaker 2

the the execution on the Olympics was really almost flawless. And if you if if all of our the entire Olympics was offered, throughout, Europe on our product. People are spending a huge amount of time, as you've seen it, times what it was before, in for for PyeongChang. It was very simple. The navigation was simple.

We spent a lot of time making sure we get the product right. That's going to help us. But we're also, as I've said, we're learning. One of the things that we're that we've learned along the way is navigation and simplicity is very important for people to be able to find the products that they want, particularly with a complicated product like the Olympics, and it's really working. We'll have Beijing coming up in a few months.

It's very unusual that we get a back to back like that. So we think that we can do better in terms of keeping subs and growing subs because we don't have a two year lag between the two games, which is advantageous. The other thing that we're learning as we look to roll out outside The U. S. Is that AdLight is a really compelling product.

You know, we're we're generating about $6 in advertising per subscriber here in The US with three minutes of advertising, and the the friction for users is nonexistent. You know, when they used to seeing fourteen, eighteen minutes to see three, and so there may be a real strategic opportunity for us here. We're doing extremely well in packaging that product together with Linear, together with with AVOD here in the in The US. And so whereas a year ago, we thought everything would just be subscription. We're looking at at at at AVOD as a meaningful opportunity to go into markets at a lower price, get more scale, and be able to pick up actually more money.

We're making more money on our AdLite product by an awful lot here in The US. And so doing that requires more engineering, more coding, but we wanna get it right. And as JB said, as we get closer, to to, to the Warner Brothers discovery to our transaction, we'll continue to look. Right now, we're both accelerating, and and Warner's doing a terrific job. John Stankey and and Anne and Jason.

You take a look at and Casey, you take a look at the the momentum that they have. They're driving hard. We're driving hard, and then we'll true up together. At some point, we really do have our strategy. We can't share it with you right now, but we will look carefully as to how we wanna true these up together.

And so that might affect, as we get closer to the approval, you what exactly we do knowing that we're coming together as a new company.

Speaker 4

And, Kokja, maybe one thing that I'd like to add is your question on churn. So that continues to track very nicely ahead of our plans. And most importantly, role to pay is also very stable, as I said, close to 80% across our various products. And to your point about some of those distribution partnerships starting to come off of the initial period, that's another area where we've actually been positively surprised. Growth is a little lower there, as you would expect, but not as meaningfully lower as we had modeled.

It's actually been a positive surprise.

Speaker 1

Great. Let's go to next question.

Speaker 0

And your next question comes from Steven Cahall with Wells Fargo. Your line is open.

Speaker 7

Thanks. One for David and one for Dune. David, some press reports suggested that you might have made some comments at Sun Valley about the merger, maybe timing and further industry consolidation. For those of us who weren't invited to conference, I was wondering if you could just maybe expand on some of those comments in this public forum. And then Gunnar, I think you reiterated being at peak investment this year in terms of the AOIBDA drag at NextGen.

As you think about the merger with WarnerMedia and the DTC services, I know spending on content remains pretty sacred. But when you think about either stack or tech, is there any reason that you might decelerate that that you're going to be combining all these systems at some future point? Could that create any upside to maybe the five times leverage target when you close? Thank you.

Speaker 2

Thanks, Stephen. Let me first speak to the merger timing. I was in DC last week. I met with across the board, spent the full day. There's broad support for this transaction.

We haven't heard any pushback. We haven't seen any push public pushback. This becomes a very strong company for consumers, a more compelling streaming business. And so right now it feels to us on every level like, we've seen green lights, we're not seeing any yellow lights or red lights. Having said that, we're not in control of the timing.

Disney was able to get their deal done in six months. Everything so far is extremely positive, but some of the timing with respect to the IRS and the DOJ, we can't, they're working very effectively with us, the AT and T team and John. John has a terrific team that's working with our team. But ultimately, it be significantly sooner. It could be a little later.

We're just not in charge of the timing. But we feel very good about it at this point. There's nothing that we see and we're still hoping that we could really get lucky and it'll happen a lot sooner. And that's what we're all pushing for.

Speaker 1

On

Speaker 2

consolidation, look, I take a look at this business, Warner Bros. Discovery, and there's just the toughest thing to do is to put together a great library or a great menu of content or IP. That is the most difficult thing to do. Yes, we need a strategy for what the price is. Is it added?

Is it add light? Is it exactly how do you go to market in each country? But the toughest thing to do is come up with a menu and have the strength of content to not only get people to come there, but get them to stay. And one of the things that's happened since our deal is you look at the Amazon deal or you look at the announcement of the Reese Witherspoon deal, almost $1,000,000,000 for that basket of content, dollars 8,000,000,000, almost $9,000,000,000 for the basket of content that MGM has, great company. Reese developed a great company.

But we own a significant amount of the MGM library, this new company when it comes together. Harry Potter, King Kong, Godzilla, Batman, Game of Thrones, you look at what Casey is doing right now with Hacks, White Lotus, Mayor of Easttown, Sex and the City coming back, Friends, Friends reunion, Space Jam having a big week, a big week against the Marvel property. And so which Toby put together, Anne and Jason, they're sitting on top of just an extraordinary library of IP, Hanna Barbera, all these things you cannot create. And so we look at all of that and we say, we can't wait to close. We think we have the broadest, most compelling IP, together with what Discovery has.

And as Gunnar said, we're seeing over three hours of engagement. Our churn is very low. We have great nourishment. And the combination of Harry Potter, King Kong, Batman together with all of our great nourishing content globally and all the local content we have around the world as well as sports and news, we think makes us really compelling. Having said that, you look at here's two transactions that have happened.

People need more IP. I believe that what we have is not only do we have, I think the strongest set of IP, but we have the broadest global we have the most global content in language of anybody. So I think we start off in a very, very strong position and I think we're fine if nothing happens. But I believe that over the next couple of years, there's going to be more and more people are going to look and they're going to raise their hand and there'll be more consolidation, there'll be more IP library sold because you need a lot of content to be successful. And I think people are going to take a look at what we have, what John Stankey put together, together with what we have.

And it's really going to be formidable. Disney and Netflix have gotten across the lake. And we think that this will be the third global streaming service, successful, sustainable. That's our mission. And a lot of the other IP that are subscale, will probably be raising their hands or people there'll be a lot of consolidation.

And some of that may be opportunities for us, but right now I really like where we are.

Speaker 4

Stephen, let me take the other question on peak investments. Again, as said, we're reiterating that expectation that 2021 is the peak here. And again, I think it's just it's coming together very nicely, right? You're seeing the revenue contributions kicking in. We're tracking at an annual run rate of $1,600,000,000 next gen revenues now, significant step down in our startup losses from our investment initiatives overall.

So this is a number that we've been talking about previously, and I don't want to go through all the details again why, but we will be able to get some nice profitability out of streaming at comparably lower subscriber numbers than us earlier. To the second part of your question, HBO Max had guided to 2022 being peak investment year. That's how we reflected it in our model as well. And there is no update right now as to sort of the

Speaker 1

combined operation as you would.

Speaker 4

Position here. And again, that perspective, while I don't want to give an update on that 5x leverage expectation right now, again, I view that as a non issue. We have a ton of confidence that we'll very, very quickly get to where we need to be. And

Speaker 0

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

Speaker 8

Thanks so much. A couple of questions, if you don't mind.

Speaker 7

Gunnar, on SG and A, it

Speaker 8

was down quarter over quarter in The United States. And you mentioned coming off of launch marketing or more efficient marketing. Is this 2Q level sort of a good SG and A level that we should expect to continue? JB and David as well, JB, what are you seeing from Discovery plus so far in international markets? How does that inform your launch strategy for upcoming markets?

And in particular, you think about pricing for this service, are you better off pricing at a premium for super fans or pricing low and trying to drive the services broadly as possible? Thank

Speaker 2

you.

Speaker 4

Let me take the SG and A question quickly. So the way I would look at this, Doug, is and I said as much earlier in prepared remarks, view this sort of $250,000,000 roughly, give or take, level of investment losses as a probably best estimate as of today for the third and fourth quarter. That implies, since we're assuming revenue growth, that we are planning to spend more. And again, we want to continue making those investments. It's a growing product with, again, a very, very strong long term value proposition.

So you should see a general trend of expenses growing, but very much in line and then over time slower than the revenue side.

Speaker 2

Just, look. The in terms of our all in mission our all in mission, we're we're not gonna get into how we're gonna price in each market at this point because it wouldn't be appropriate. We're not going to talk about exactly how we're going to package at this point because we just can't do that right now. We have a compelling plan. We're looking at we're going country to country.

We're actually trying some different things so that we can learn more. We're we're we're watching, you know, the great success that that, that John and and Anne is having as as they accelerate. But we're focused on 200,000,000 global subscribers. This is not about niche. This is about global subscribers.

And we we don't for me, you know, after we close this deal, it is gonna be two absolute missions. Mission number one is drive direct to consumer to 200,000,000 subscribers in every language in the world and, with a product that's easy to navigate and use. And, we think we can do that. When we close, We're both growing, so we're going to start with a good base to get there. But that's the left side.

The right side is focus on having the best creative company in the world. And Warner Bros. Has been the greatest creative company in the world, the place that the talent wanna come, the place where they feel nourished and supported, and that's the history of Warner Bros. And most of the great content that that I've seen, that we've all seen, we don't even realize it. In the end, we see that Warner Brothers shield, and it stands for something.

It stands for great storytelling. And we are one maybe the only company that has the ability to focus only on that one thing. We're not in the phone business when this deal closes. We're not in the retail business. We're not in the cloud business.

We're not in cable business. And so that's the focus. And that singular focus, I think, will will drive a great culture. This is where people that that care about content, that love content, that saw the magic when they were kids and they looked up at that screen. That's why we all got into this business, and that's the only business that we're in.

And I think that that, together with the fact that Warner Bros. Itself, we can open a movie everywhere in the world as well or better, maybe best of class, and that's not going away. The motion picture business is not going away. It's why it's the top of the patina. It's why the greatest writers, producers, and creative talent came.

And when you look up at that big screen, that's where stars are made, and that's where the magic happens. And so 200,000,000 subscribers, a great team putting these companies together to drive toward that, and a great creative culture with a with, at the very top, a motion picture business that'll be a 100 years old in two years and, and has a heritage of of all the great storytelling that we all grew up with. That's the company, and that's what we're gonna drive for.

Speaker 6

Great. If you want me just one one thing I can say on the current pricing to your question of Discovery Plus, I will say that what we've seen so far is the very broad, very scaling distribution. This is the international growth is not driven by one market. We've seen very even and very significant, you know, million plus markets so far across some of our biggest territories. So we feel that it's not necessarily a question of going high price, smaller, or low price, you know, broader.

The reality is, that we're able to hit this sweet spot right now with the pricing that we have in most of our markets, which is on average for the entertainment tier, in this 4 to $6, price range, and that that's scaling very nice. Now again, hard to talk about the globe in one, swoop because ultimately markets where we have more premium sports, we will price higher markets where we don't, and then have lower price sensitivities like LatAm or Asia will price lower. But generally, we feel like we can actually hit a very attractive price point, much higher than our wholesale pricing today and still be, in a sweet spot that ultimately delivers scale at the same time.

Speaker 1

Right. All right. Thank you. Question. Let's go to the next question.

Speaker 0

Your next question comes from John Danidis with Wolfe Research. Your line is open.

Speaker 4

David, maybe we could start. Can you give

Speaker 9

us more color on Discovery Premier? How much more inventory is available for you to sell into the market? Can you double or more again? And what is the CPM lift relative to the rest of the portfolio? And then maybe shifting to Discovery plus any more early trends you could talk about from a viewing perspective?

Is the proportion of time spent there on specific networks or programs consistent with your linear networks? And for the content that's premiering on Discovery plus are you seeing a lift in subscriptions or impact on linear ratings? Thanks,

Speaker 2

John. Well, first, the upfront was the best upfront that I've seen in my career. On average, it was up about 20, and we and we were able to beat that significantly. So I think I I believe we were best of market, but this was a market that was up 20, and we picked up we did much better than that. And one of the reasons is because of the Discovery Premier.

And in some ways, it's a great story, but it's it's one that, you know, it starts off with the fact that we we're we're not getting enough, and we haven't been getting enough for in CPM for the great content that we have. And broadcast is in the sixties and, you know, where we have been in the twenties. And so we we one, we made some more progress against the broadcast, But Discovery Premier is in the forties. And so, for for advertisers to be able to get content that has the same or better reach with the same or better engagement in the forties, for us, it's a dramatic increase. But for advertisers, it's a significant decrease because instead of buying a broadcaster for $64, they're buying us for $45 or $43 or $47.

Dollars. And so it's a real win win, and we're able to service the we have great demos, and we're able to go you know, not only do we have the premier product, but now we have Discovery Plus with the engagement and a much younger audience. And so we could put together between linear and Discovery Plus and go a really compelling package. And the result was, our, you know, our most successful upfront. And I think it's the fact that, ratings are down in the aggregate is is something that we're gonna be living with for a long time.

But look. I I've told this story before. But in in the nineties, we went up. And when I was when I was running the cable group, broadcast was going down and, advertising rates were going up. And Wells said that can't continue.

And it continued to the date. It's been going on for twenty years. I can't predict that if that's what's going to happen, but there's not a lot of great inventory out there. The inventory is declining. And we have some of the best inventory out there.

And then one, it's generally underpriced. So when we get big increases, it still looks good. But two, the overall bouquet of what we're offering now between the young demos on Discovery plus and Go and the engagement and the audience that we have on all of our brands and what we can put together for our advertisers, there's real scarcity. You know? You you have the you have the scatter market at plus 50 right now.

And, there are a lot of there are a lot of others that are under delivering, and so they'll be out of sale. So in general, when you see the fourth quarter, you're gonna see a real opportunity. When I talk about visibility, it's because the numbers in terms of the upfront that's gonna start in the fourth quarter, and it's a good thing because maybe we'll be down 15%, but maybe maybe the it looks like the advertising is gonna be up dramatically more than that. We can't predict whether that'll continue, but it's right now, it's a trend with scarcity and and the way that our content and linear content can deliver an audience for an advertiser, the prices are And so we hope that continues because it's an offset, and it allows us to still grow in linear, which is meaningful.

Speaker 6

And generally, I'd say to your question about, engagement on Discovery plus and content, it does it does, John, largely, obviously follow a lot of our biggest networks. But the the genres are certainly in the crime, paranormal, home, the discovery content. A lot of it's sort of traditional, core genres in the linear space also are those that are driving our discovery plus activity in The U. S. That is obviously reality in the TLC sort of genre also a big driver for us.

As you spread out and go internationally, it becomes a little bit more diverse in the sense that obviously we have bigger broadcast content in markets like Poland, The Nordics, Italy. And so we have bigger entertainment formats also that are working extremely well. Then sports, which we've talked about both in terms of the Olympics and outside of the Olympics. So it becomes a slightly more diversified story outside The US. But in The US, you know, driven by a lot of the core genre you'd think about us for TV.

Speaker 1

Okay. Let's go to the next question. Thanks.

Speaker 0

Your next question comes from Jessica Reif Ehrlich with Bank of America Merrill Lynch. Your line is open.

Speaker 10

Thank you. A couple of questions. There have been press reports regarding your interest in Channel four in The U. K. And it's great that you're still looking at transactions while you're about to close one of the biggest.

But can you talk about M and A priorities or opportunities outside The U. S? Can you give us an update on what's going on in Poland from a regulatory perspective? And then finally, in advertising, how much crossover is there on the various platforms for your advertisers? Do are you tracking different advertisers to different platforms?

Speaker 2

Let me start, and then, JB, I'll pass it to you. We can't comment on Channel four, but I would just say we're focused on one thing and one thing only, closing this transaction and putting together this spectacular company that has global IT leadership in terms of the content that we have, local content, sports news, the best bouquet of content together with strong leadership at both companies and both having a really good platform that consumers are engaging with and liking. This is a even this our focus is singular. Close this deal and drive this company, as I've said, drive the subscription piece, create a culture, and drive a culture where creative talent wants to come and wants to tell their stories. That's our focus.

So we're not going to comment on any other specific transaction. But I do think that there's a lot of players that are subscale. A lot of them are going to be figuring out over the next couple of years what they do. And the good news for us is we think our hand is very, very strong domestically and around the world, and we'll focus on getting this deal done and taking that hand to market.

Speaker 6

And Jessica, the only thing I'd add to that one is also we take it as a, we're proud of the fact that unfortunately every time that anything is potentially up for sale, our name gets mentioned because we have obviously had a successful track record of acquiring, integrating and then successfully managing all sorts of businesses. The reality is oftentimes, and as David said, particularly these days, focus is in a different direction right now with the closing of the Warner deal. That's our primary focus. So, in terms of, the ad sales, climb, and I'll come to pull one at the end. On ad sales, we do see a vast majority of our clients overlapping between linear and digital.

So it's a very strong correlation and a number of clients we're doing both. On Poland, look, we as we've said, I think publicly in the past, we remain very committed to the business. It's a great business. It continues to be a growth business and a very healthy business for us. The environment is obviously challenged.

We're actively talking to all the different constituents and stakeholders to make our case. And we think it'd be very, very economically irrational for for the government to try and pass any laws that ultimately would change our position and make the environment way less attractive for foreign investment, not just media, but any foreign investment. And so at the end of the day, we're continuing to work, in that situation aggressively on all sides. The US government, the EU, have all been very supportive and fully behind us, And, we'll keep you posted, as that continue to go on.

Speaker 10

Thank you.

Speaker 0

And your next question comes from Robert Fishman with MoffettNathanson. Your line is open.

Speaker 11

Good morning. David, following up on your earlier IP comments and tying in what you're seeing with the Olympics, can you share updated thoughts on how important international sports rights are for your company, especially as it relates to driving Discovery plus subs when the next round of sports rights come due? And then for you or JB, can you update us on how the Pay TV ecosystem looks outside of The U. S. As it relates to cord cutting and whether you plan to be more aggressive shutting down linear cable networks as Discovery plus ramps up?

Speaker 2

Let me just start by with the cord cutting question. Outside The US in the aggregate, with the exception of last quarter, the the period during COVID where we really grew, we're doing as well or better as we've ever done in history. This past quarter, we were strong as much stronger than we were in overall share than than we were in '19 or any of the or all those prior years. And unlike The US where pricing is so high, pricing for entry cable is much lower around the world. And so there is some decline and there is some decline in viewership, but it's much more moderated than what it is, in The US.

JB can speak a little bit more to that, and then I'll we'll jump in on the sports piece.

Speaker 6

Yeah. I I think, you know, again, it's hard to paint it all with one brush. There are, as David said, generally broadly, we do see some cord shaving, but the cord cutting has remained fairly stable internationally. So we don't see the same sort of dynamics as we've seen some in The US. The cord shaving is really sort of elements of some of the higher tier and higher price point people turning down to lower tiers in certain markets.

But those are, I'd say, more limited and in the higher priced markets like Northern Europe in some cases. Then there are markets like Brazil, for example, for macroeconomic reasons that certainly have seen subscriber decline over the last few years as the middle class has been squeezed. But at the same time, we know in the markets like that that consumption and video viewership is as hungry as ever. And that's where, particularly with the launch of Discovery plus coming, we're at an even more attractive price point than what they would have paid even for a more reasonably priced pay TV package, we're excited to see those subs that might have left the pay TV bundle over the last few years have a chance to come back to us at a more attractively priced Discovery Plus option going forward. In terms of shutting cable nets like I think Disney has announced, we still see a very healthy business on the pay TV side.

The hybrid deals we've talked to you about where we've done deals with existing partners to continue carriage of some of our channels at healthy economics plus launch Discovery plus and so do a kind of two for one. Those have been very successful for us so far. We continue to see a lot of opportunity to be able to drive both of those. So we don't see necessarily the shutdown scenarios. But over time, there may be a handful of markets where we say it may be worth experimenting.

But for now, we see a healthy ecosystem and healthy partnerships with this hybrid model.

Speaker 2

On the sports, we're learning. I mean, we've we've been at it for now over four years. So we had we needed to find a better product, then we were going direct to consumer in Europe with individual sports. And the good news is we're trying different things, and we're trying to figure out ultimately the consumer is going to decide how they want it. And we're finding that we're having more success when we put the sports together with the entertainment, together with the non fiction.

But it's early days. It's still only the third inning.

Speaker 4

So in a lot of

Speaker 2

these markets now where we have football, where we have cycling, and we're putting it all on D plus we're looking and we're trying to get a sense of what's the acceleration of subs. What happens to the churn? Right now, it looks quite favorable. We're also anxious to see, which will we're not getting an inside look at all in Warner, but they launched in Latin America, they launched a lot of very compelling sports like football, in in in Latin America. What what is their experience?

The Olympics has been a really good experience for us. We're doing very well with it. Share is up 30% versus PyeongChang. We're we're finding that the engagement is much higher, as I've said. And so we don't know yet what the churn is gonna be.

I think it's gonna be helped by the fact that we have Beijing coming. But, ultimately, when the when when these companies come together, it's all about the the IP menu. We have news. What role will news play? We have sports.

We're we're we're it's not the leader. We're one of the leaders in the world in terms of the sports. You know, Jeff Zucker and and and and John Stankey and Jason got were able to lock up sports rights in The US with some of the best leagues outside of outside of football, which is compelling. So we look at all that IP and figure out what do we do with it, how do we offer it, you know, is all pay, is some of it free, is it, is it all together in one package, is it in two packages? But it's you know, the the sports, I think, is is is not that different from, from Harry Potter or King Kong or DC Comics or a lot of the HBO, IP.

But with the exception of the fact that we don't own most of the sports. So what we've done is we've tried to get long rights for those sports and be very careful about what we pay for. But we will you know, there there is a difference in that, you know, when you're building these the franchises that we have, whether it's Chip and Joe, whether it's whether it's the Oprah Winfrey, product or whether it's whether it's the d whether it's, Warner Building DC, you own that forever. And sports, you have to eventually come back and pay for. And so there will be a a view over the next several years of how that how important sports is, how and and what the return is on it.

But we're very happy with the fact that we have fantastic sports globally that we'll be able to use when this company comes together in the package. We're doing very well with sports in Europe right now. JB, anything to add?

Speaker 6

I think that's exactly right there.

Speaker 4

Robert, I want to just repeat one thing that David said in passing to make sure that everybody has heard this. Our second quarter this year was the second strongest in our history internationally when it comes to actual audience delivery in terms of eyeballs of viewership, second only to last year's second quarter, which was obviously impacted by the massive COVID spike. So it is a fundamentally different story internationally versus domestically. Yep.

Speaker 2

And we're getting better at doing local content in these markets that people love and they wanna watch. We're gaining share. So even though, you know, some people may be bailing on linear, the linear advertising market is extremely strong. Our share is growing, and we're doing what's very hard. We're mark we're we're programming in these countries in every language, and we have teams on the ground that are creating content in language, in country, and it's paying off.

Speaker 1

That was a nice question, please. Thank you.

Speaker 0

Your next question comes from Ben Sweenburn with Morgan Stanley. Your line is open.

Speaker 3

Thank you. Good morning, everybody. I wanted to ask about the upfront and then also about the streaming subs here in third quarter. David, obviously, there's tremendous demand for linear television as we head into the fall season. Can you talk a little bit about whether Discovery was able to navigate some of the measurement challenges that Nielsen's created in the past around delivery and make goods?

Were you able to do more non Nielsen deals? Or do you think that's even cost the company any money in the past and maybe it's something we shouldn't be that focused on. But I know you've spent a lot of time on it and it seems like the demand side of advertising is strong. I'm curious if you could just comment whether you guys feel like that's a headwind or you've sort of navigated around it. And then on streaming, I don't know if this is for Gunnar or David.

The $18,000,000 number, I guess, captures probably the Olympic lift you got, and it seems like you're talking about most of your international launches coming in Q4. I'm just wondering if there is any other headwinds or tailwinds we should be thinking about in the third quarter or if we should think that there probably won't be a lot of growth here in August and September. Just anything you want to add as we think about Q3. Thank you.

Speaker 2

Thanks, Ben. Look, we have a big data operation. And the good news is on Discovery plus and OnGo and to some extent on linear, we've been working very aggressively to build our own data, and we've been working with the advertisers. And that has been extremely helpful. In the end, if we could have better data, you would see a dramatic increase in that's the future is to get better better data.

Unfortunately, you know, Nielsen is a whiff. And, you know, it's it's it's just, you know, it's massively disappointing that Nielsen can't get its act together? And the answer is we have lost money. Everyone's lost money. You know, you you you it's just, you're dealing with a very antiquated delivery system.

We've all learned how to get along with it. We do it by augmenting it with our own data. But, you know, recently, they've just been wrong. I mean, it's one thing if you have an antiquated system and then you augment it, but the but the antiquated system itself is unreliable. And so, as an industry, we've to figure out how to deal with it.

We're competing with the likes of Google and Facebook where they have, they they have the best data, the cleanest data, the most and you compare that with this antiquated system. So we continue to to to work on our own. I don't have a lot of hope for Nielsen. You know? Mhmm.

I think somehow it's an industry we're just gonna have to work our way out of it from a technology perspective and leave them in the dust because they just they just can't they can't get it together. It's a shame. Yeah.

Speaker 4

On the and on the streaming, substance then, so, look. I mean, one thing that we all need to keep in mind and that we've said so many times, it's early still, right? We don't have a full year yet of a normal, cadence, and that's just important to keep in mind. But what's very clear is that obviously there is a seasonality throughout the year and the summer months, you would expect across video in general, are not the strongest. And if you look at the numbers that we have reported, we've been able to add a million subs on average across these months, which, again, I think I'm I'm very pleased with.

And to your point about the Olympics, it's important to keep in mind that there is a certain amount of free trial in those. So our 18,000,000 sub number does not include all of the subs that we are gaining or will gain through the Olympics. Gotcha. Good point. Thank you both.

Speaker 1

And your last question, please. And

Speaker 0

your last question comes from Alexia Quadrani with JPMorgan. Your line is open.

Speaker 12

Hi. Thank you. Just two quick sort of follow-up questions, one on advertising and one on your streaming service. On the advertising side, it's been incredibly strong, which you've highlighted through the second quarter. We've seen it industry wide clearly in your results.

I'm curious if you're seeing any cracks in the advertising strength so and far in Q3 just given the delta variant and sort of the recent return of spikes in the pandemic? And then my other question really is just on the AdLite product that you have that seems so much more profitable in terms of bringing more revenue. Is that where you're seeing the higher percentage of growth in terms of new sub adds?

Speaker 2

Thanks so much, Alexia. We're not seeing any slowdown at all at this point because of COVID. In the aggregate, by the way, as a company, we're now about flat to where we were in 'nineteen, which is a big deal. So when we say we're up this percent or up that percent versus last year, just versus 2019 in terms of level setting, we're about flat, or just about flat to 2019, which is a good starting point for us now to strive and drive to accelerate off of that. You know, I I the AdLite product, you know, as is extremely strong, but I don't think that we're breaking out, how our growth is in The US in terms of AdLite versus subscription.

JB, are we breaking that out at this point?

Speaker 6

We're not. Not. Only to say that at the end of the day, we're seeing actually still continued healthy growth on both sides on both products. So, it's not sort of one dominant and one we're seeing continued growth on both.

Speaker 12

Okay. Thank you.

Speaker 4

The only thing I may add on the advertising side, to state the obvious, comps are obviously going to get a little tougher as we go into the second half. Right? So we continue to see a very, very robust market, robust demand, no signs of COVID break, but obviously we're now comparing to a slightly higher baseline in 2020. And we also across the market obviously had a little bit of a tailwind from political advertising as I pointed out earlier. So those are two factors to keep in mind.

Speaker 12

Okay. Thanks.

Speaker 0

Today's conference. Thank you for joining Discovery Incorporated.