Warner Bros. Discovery - Earnings Call - Q3 2020

Transcript

Speaker 0

Good morning, everyone. Thank you for joining us for Discovery's Q3 Earnings Call. Joining me today are David Zaslav, our President and Chief Executive Officer and Gunnar Videnfels, our Chief Financial Officer. You should have received our earnings release, but if not, please 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 comments today regarding the company's future business plans, prospects and financial performance are forward looking statements that we make pursuant to the 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 they 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 December 3139 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 1

Good morning, everyone, and thank you for joining our Q3 earnings call. I'm pleased to report another very strong quarter and set of operating results even amid continued challenges from COVID and market uncertainty. Discovery continues its strong, steady, and stable operating performance despite the secular challenges across the industry. Discovery remains uniquely constructed to navigate and grow during this time of uncertainty, disruption, and accelerated change. Our core strategic advantages differentiate Discovery and give the company a distinct lane in which to attract audiences and drive success.

Discovery is the leader across multiple popular family friendly verticals with universal appeal anchored by brands and personalities that resonate globally and help people curate. We own and control the vast majority of our content, almost all of which is unencumbered across all regions and platforms. We're above the globe. And we are able to monetize our content across one of the broadest global footprints in the industry, across traditional linear ecosystems, including both free to air and pay TV, as well as direct to consumer streaming platforms. These advantages, coupled with a flexible, low cost production model, give Discovery a super efficient programming and content model to drive industry leading operating margins and free cash flow conversion.

We are a free cash flow machine that supports our ability to invest in strategic high growth next gen opportunities. Our plans for an aggregated direct to consumer offering have come into clear focus, and we look forward to providing a look at our product, roadmap and go to market strategy in early December. We believe you will come away as enthusiastic as we are about where we are going with our global direct to consumer streaming strategy. As you know, the cornerstone of Discovery's strategy has always been and will continue to be nourishing, entertaining, and delighting our fans around the globe, with programming anchored by personalities that are recognized, trusted, and loved across durable genres and verticals that connect directly with viewers. Our content and beloved brands are more resonant today than ever before.

You see that in that the viewership scale that we've achieved globally has increased significantly over the last six plus months. The global pandemic has refocused all of us on what matters most, the people, family, and friends in our lives. A reordering of priorities and interest in content that is positive, safe, and enriching. Our brands, personalities, and content are a magnet for those seeking comfort and familiarity during a time of great unease and uncertainty all over the world. In many respects, we are seeing this play out with our audiences in a meaningful way.

Everywhere around the globe and our content and genres fit squarely into this moment. To that point, our share of viewing both in The US and across most key international markets are up substantially. In The US, we have gained the most share among prime time TV viewers, 18 to 49 year to date, growing by 130 basis points. And in the third quarter, even during a heavy news cycle, we have grown share by 150 basis points as viewers 18 to 49 are turning to our Discovery channels. In fact, our top network TLC beat every one of the cable news nets in the third quarter.

Internationally, we achieved our fifth consecutive quarter of year over year share growth, up 5% in the third quarter, while our audience increased 10% year over year, outpacing pot level growth, another positive sign for the popularity and durability of our content categories and brands around the world. In terms of commercial success, behind the firming advertising marketplace around the globe, we have posted healthy sequential improvement again in our advertising revenue growth, which while still negative year over year is showing demonstrable improvement around the world. We have seen advertising partners resurface around the globe. And as measured by our performance in the recent upfront market here in The US, we are very encouraged. With respect to the upfront, now that it is wrapped, I'm proud of what our team has accomplished.

We were methodical, confident in the popularity of our brands and demand for our categories. We held firm in our assessment of our deliverables, and I believe we took another big step forward toward achieving fair value for our region engagement, resulting in continued growth in share of wallet. We've seen great momentum from what we refer to as our premier product, which is really breaking out. We offer advertisers an unduplicated broadcast equivalent reach across our portfolio at a far more competitive CPM than broadcast and a very significant premium to even our highest realized CPMs on our individual networks. It's a win win.

Gurner will take you through Q3 on our outlook, but we remain confident that as we return to a more normalized operating environment, television will continue to demonstrate its value and importance within the media ecosystem. And perhaps even more so now, given the increasing fragmentation in viewing patterns and difficulty in reaching eyeballs. With regards to distribution, we continue to hold our own, a reflection of the value we bring to the table, an environment where many of our peers are being priced down aggressively at or tiered. We grew modestly in The US, helped by recent renewals. And I'm pleased to note that just recently, we completed mutually beneficial renewals with Mediacom and NCTC.

Those deals are on top of the positive deals we concluded early in the year with Comcast, Charter, and Cox. And very soon, we look forward to addressing the many homes in the country that currently do not receive our contact. The narrative is similar, if not a bit more advanced internationally, where we have begun to lean in more intently directly to consumers. In markets like Norway, Sweden, and The UK, we have entered into win win deals with distributors, hybrid partnerships that expand our long standing linear distribution relationships to also include b to b to c, with additional flexibility to go directly to the consumers ourselves. Our new direct to consumer partnership with Sky in The UK exemplifies this approach, where they will offer our UK based aggregated product, Discovery Plus, to their millions of Sky Q customers starting this month.

It's early days, no doubt. But given our share of market, which in certain regions is north of 30% and secured by highly valued local content, we are optimistic that the path we are on will address the opportunities that are surfacing from evolving consumption patterns around the globe. We remain well positioned strategically, operationally, and financially to advance and further refine our direct to consumer approach. Our management team has evolved under strong technology, product, and content leadership, And we have a definitive path to drive engagement and scale. An unparalleled library of loved brands and personality driven content, which will support a roster of exclusive and windowed content, all culminating in a platform that is global in focus and local in appeal.

It's a critical time for our company and our leadership team, and look forward to sharing more about why we are so enthused for the next chapter of discovery in early December. With that, let me turn it over to Gunnar to take you through the quarter and a financial update.

Speaker 2

Thank you, David, and good morning, everyone. Nine months into the global pandemic and the macroeconomic fallout resulting from it, I am very pleased with our performance and the command and control we have demonstrated over our business despite the uncertainties that exist here in The U. S. And around the globe. We continue to be laser focused on efficiency across our global cost footprint and reallocating capital to higher growth next generation initiatives.

We are also proud that we have been able to return nearly $230,000,000 to shareholders through our share repurchase plan in the third quarter, for which we noted we would allocate approximately 50% of our free cash flow. This amount represents essentially just that from the time we reengage in our program. Turning to our third quarter results and starting with U. S. Networks, advertising revenues decreased 8% year over year.

This was largely a result of COVID related weakness in demand as well as continued declines in pay TV subscribers leading to lower universe estimates. We were, however, helped by healthier scatter CPMs in the quarter, which were up high single digits year over year. Distribution revenues increased 2% year over year as affiliate rate growth offset subscriber declines. Subscribers to our core fully distributed networks, which account for nearly 80% of our distribution revenues, declined by 4%, while our total portfolio subscribers declined by 6%. You'll note this is a slightly lower decline than in previous quarters as we benefited from additional distribution of certain networks as a result of our recent renewals as well as continued strength from virtual MVPDs where we remain well distributed across the many operators.

As David noted, we are pleased to have recently completed additional distribution renewals with NCTC and Mediacom. Now turning to international networks, which I will discuss on a constant currency basis. International advertising revenues decreased 9% year over year, led primarily by sequentially stronger advertising momentum in many of our key European markets. Indeed, markets such as The UK, Germany, Spain and Finland all finished with positive year over year growth for the quarter. Our European region was down high single digits in the third quarter.

In Latin America, while key markets appear to have bottomed and trends have sequentially improved, the overall region's recovery will likely follow an uneven path. And the Asia Pacific region, our smallest, was approximately flat year over year during the quarter with some markets now generating positive year over year advertising growth. International distribution revenues decreased 4% year over year. Like last quarter, Bundesliga was a modest headwind to year over year growth. Additionally, our schedule of sporting events is condensed, while a number of events that have been delayed still have not aired, which obviously impact subscription revenues as well as advertising revenue.

Finally, we're seeing a modest pickup in churn from the more economically sensitive segments of the pay TV ecosystem in Latin America, primarily from subscribers who are delinquent on payments and are no longer being reported by distributors. We expect this to be more COVID related and a shorter term disruption. I'd also like to offer an update on ad sales for the fourth quarter. October has been strong by this year's standards, with domestic ad sales roughly flat and international ad sales down just slightly. This may not be a trend we would necessarily extrapolate, however, for the full quarter given, number one, some tailwinds from political advertising in The U.

S. In October and number two, risks from rising COVID case numbers globally and beginning government countermeasures, especially in Europe, which pose risks at the back end of the current quarter. That said, we are confident to see sequential improvement in the fourth quarter versus Q3 again. Total operating expenses for the quarter were up two percent ex FX. Cost of revenues were up 7% ex FX, largely due to sports, given the number of postponed events from the first half of the year, like the French Open and the Tour de France, which were rescheduled into the third quarter.

Q4 should look like Q3 from a content ramp perspective, from both linear as well as direct to consumer, where we also increased our investment in sports initiatives like Alsvenskan in Sweden, which is primarily available as a premium tier on Dplay. Furthermore, content production is almost back to normal with only 10% of our current production still paused primarily due to travel or local restrictions. Total SG and A decreased 6% ex FX, behind reduced marketing and travel and entertainment spend. Year to date, total operating expenses are down 2% ex FX, and we remain on track for total operating expenses to be flat ex FX for the full year. Moreover, we continue to expect that total operating expenses for our traditional linear business will be down mid to high single digits year over year ex FX with the savings reinvested in our next generation initiatives.

During the third quarter, we recognized the deferred tax benefit in The UK and a benefit from a favorable multiyear state resolution. Year to date, our effective book tax rate is 21%. For the full year, we expect an effective tax rate in the low 20% range. GAAP diluted EPS increased 26 to $0.44 per share due to the above mentioned tax benefit this quarter versus a tax expense in the prior year quarter as well as a goodwill and intangible asset impairment charge taken in Q3 twenty nineteen related to our Asia Pacific region. Adjusted EPS on the other hand decreased 7% to $0.81 per share.

Now turning to free cash flow. Free cash flow decreased 11% in the third quarter largely due to COVID related weakness to revenue and AOIBDA. For the trailing twelve month period at the end of the third quarter, free cash flow was $3,000,000,000 again, a testament to our free cash flow generation capabilities and our continuing focus on extracting efficiencies even amid the most tumultuous macroeconomic backdrop in the history of the company. As a reminder, we faced an unusually difficult free cash flow comparison in the fourth quarter, where we converted over 100% of our Q4 AOIBDA to free cash flow last year and increased cash content spend in the fourth quarter of this year as we return to more normalized production levels. Our balance sheet and liquidity profile remains healthy as we ended the quarter with net leverage of 3.3 times at the midpoint of our target leverage ratio with $1,900,000,000 of cash on hand and including $250,000,000 of short term investments and an undrawn $2,500,000,000 revolver.

Furthermore, during the quarter, we executed a debt exchange, which pushed out weighted average debt maturities to roughly fifteen years and lowered our cost of debt to 4%. Finally, FX was an approximate $15,000,000 tailwind on revenues and around $15,000,000 headwind on AOIBDA. For the fourth quarter, we expect foreign exchange impact to revenues to be a $5,000,000 tailwind and a $15,000,000 headwind on AOIBDA. Lastly, as we head into the final weeks of the year and prepare for 2021, I am encouraged by Discovery's position in the media landscape even in the face of macroeconomic and secular challenges ahead globally. I believe our solid financial footing will enable us to weather the macroeconomic storm while supporting our strategic initiatives to meet the secular challenges head on.

We remain very enthused and excited about our strategic pivot and the news that we plan to share with you in the coming weeks. Now David and I are happy to take your questions.

Speaker 3

Thank And our first question comes from Doug Mitchelson from Credit Suisse. Line is open.

Speaker 4

Thanks so much. Good morning, everyone. David one for David, one for Gunnar. David, the T Mobile relaunch of a streaming live TV service was certainly interesting, and you talked on this call about distribution being relatively broad on all platforms. With the Discovery Networks and the stand alone $10 a month vibe service separate from a new sports focused 40 bundle of channels, Can you talk about the strategy there?

And then whether this would allow other distributors to pursue a similar strategy? And then for Gunnar, I was just hoping for an update. I know you gave the cost investment in digital initiatives, but not the revenue. Was just hoping for an update where 2020 is shaping out in terms of losses on the digital investments and what's the path forward from here to 2021 and beyond for that? Thank you both.

Speaker 1

Great. Thanks, Doug. Good morning, everyone. We were very surprised with how T Mobile decided that they were going to bundle our networks, particularly because we have a clear agreement where our networks are required to be to be carried on all their basic tiers, ODT offerings. So let's just, characterize it this way.

We're in active discussions with them to quickly resolve that issue. We don't believe they have a right to do what they're doing right now. And they know. It's very clear to them, and they're focused on it. So

Speaker 4

Okay. That's interesting. Thank you.

Speaker 2

Okay, Doug. And, on revenues and losses from the from our next generation initiatives, remember, we started the year with a guidance of €1,000,000,000 plus in revenue and losses of roughly €600,000,000 We've obviously pulled that. But what I can say is that we have continued to enjoy some revenue growth. All of our numbers include contributions from our direct to consumer portfolio, obviously not at the level that we originally envisaged, but we're very pleased with the progress. We've also reduced some of the investments but continued prioritizing the strategic build out of the portfolio.

We still expect a slightly increased investment number here for the year, and we'll say more later. And also for 2021, it's a little bit too early. But again, we're fully committed to the discovery future in the direct to consumer space, and we'll make all efforts to support that.

Speaker 4

David, thank you, Gunnar. David, if you don't mind me following up, because you did mention that you had a lot of the cable deals done this year. Have you already sort of do you have line of sight on partnerships for the launch of your OTT service in The United States? In other words, is the distribution partnership end already wrapped up or well enough underway that you have line of sight and visibility? Or is there more to do there before you're really ready to launch that service?

Speaker 1

Yeah. We're gonna go into real detail. We're gonna do an extensive discussion with full disclosure in early December, which we're super excited about, where we'll take you through in every category where we're going, how we're going, why we think we're advantaged, how globally we think we can attack it, who's helping us. We have been, the whole company has been focused on this. So I'd like to you know, it's in early December.

We'll come out with the whole package. I think you'll like it very much. We've had the benefit of being at this for a very long time, direct to consumer around the world in different ways. We've learned a ton. We we see areas where it's really working and why it's working.

And so what you'll see, will will be the benefit of all of that. And as you've as you know, as as we announced, at our last call and as you saw, as we talked about this morning already, we certainly recognize the value of having distributors, multiple distributors, supporting. And distributors have recognized the value of having unique content that helps their platforms. And a good example of that is Sky, as well as multiple distributors across Europe that we've already announced that will be helping us. Just one other point.

We've had a really strong year on this issue of how do we get great content to people, engage them in our brands, grow our viewership. And and it's really reflected in the fact that we've been able to get all of our affiliate deals done this year here in The US with some of the some great distributors, large distributors, with very strong pricing, with all of our channels being carried. And it's a great deal really for both of us because we're way over delivering. They're selling into our channels. And when you look at the overall package today, you know, the real value here with so many reruns, it's basically sports news and us.

And, you know, who knows what's gonna happen now with with political? But news looks like it could potentially go back to normal, in which case there'll be really a big added benefit. But we've been able to get full carriage of all of our channels with big increases, and I think that really reflects the great work and the and the great IT that we have, domestically, here in The US. And the fact that we're number one for women. We're number two for women, and we're we have a real broadcast equivalent or higher on many nights than broadcasters.

And we'll talk about that later, how we're advantaging ourselves on that.

Speaker 4

Thank you both.

Speaker 3

Thank you. And our next question comes from Rich Greenfield from LightShed Partners. Your line is open.

Speaker 5

Hi, thanks. A couple of questions. When you think about Discovery's strategy that's coming, I know you're going to announce it soon. But just conceptually, wondering, especially overseas, how does Eurosport fit in? I mean, are you thinking about having we've seen companies like Disney create sort of a siloed approach where sports, ESPN plus is separate from Disney plus and Hulu, they kind of have sports separate from everything else.

As you go to market, is the thought when you talk about sort of an everything discovery, does that include what you're doing in sports overseas? Or are you thinking about that as a separate product? And then two, you made comments in the Q2 release. You talked about how abandonment of some MVPD deals put pressure on subscription revenue as you sort of prepare yourselves for D2C. It sounds like from your commentary that that's expanding and there's more markets that were playing in beyond The Nordics that were playing into that pressure this quarter.

Could you just help us understand sort of where you're making those decisions to sort of sacrifice short term, affiliate revenue to position yourself better overseas for D2C.

Speaker 1

Sure. Thanks, Rich. Well, first, we we're the leader in sports in Europe, and we we we're the leader with local IT. And, the real advantage that we think we have, and we'll get into more detail in December, is you have mostly big US services with a little bit of local. And we have dramatic local, local entertainment.

We have all of our our our brands and and and and cable content in language in 200 countries. And all throughout Europe, we have local sports. And we do have, as you know, some other locals some other local sport like the PGA. But one of the great things about this company, because we're in 200 countries, we have the ability like we did in Denmark to say, hey, we might be able to take one step back and two forward. How would it work if we opportunistically take all of our local content, all of our local sport, and go to market.

And what does it look like? And what is our SAC? And who will work with us? And how quickly can we sail? And so when we talked to you in December, we have a lot of learnings on what's worked and what hasn't.

There are when we can take one step back and we think that we have the goods to go two steps forward, we're now basing it on metrics and on knowledge. We think we can do two. We think we really have a free cash flow machine that will continue for a very long period of time to generate real return with great margins. But then we'll be investing thoughtfully and knowledgeably above the globe with our we've been holding our global content to go at it, and now we're gonna go at it in a way that we think is quite unique, and I've said it for a long time. Local content, our all of our existing genres local, and looking at this opportunity to add local sport.

And, you know, in some cases, it could also be local news. It's a big differentiator for us. Everybody else is looking at going above the globe or even expanding into other countries, and they're facing two issues. One, holy cow. I don't own any of my content outside The US.

What do I do now? So do I go buy it back? Do I wait to create it? Now it's gonna take so much longer to create. You know?

That's so that's a real a real issue. We don't we don't have that issue. And we have a an extensive library as well as, you know, this the real local element. So I think as you look at all the other players, great players in the marketplace, they're at a huge disadvantage here, and we think we're at a very significant advantage. And so we're gonna play into that, and we're gonna play into it hard.

Speaker 6

Our

Speaker 3

next question comes from Michael Nathanson from MoffettNathanson.

Speaker 7

I have one for David and one for Gunnar. David, on the upfront, I know the story was that you guys definitely held out for more pricing. I wonder, can you talk a bit about what you actually achieved on the pricing side? How much inventory would DG sell versus the past? And just when you look at your premium product in terms of the best pricing versus broadcast, how far is that gap?

And do you think it meaningfully closed this upfront? And then for Gunnar, I know we're waiting for the Investor Day sometime in December, but just thematically, how do you think about your working capital in a more DTC world? Do you think anything changes within the business model where you maybe will invest more in content and amortize it? But just give me a sense of maybe the impact on cash flow as you build out more DTC products globally. Thanks.

Speaker 1

Thanks, Michael. Well, look, I think a number of things worked our way. Our content certainly has a real familiarity and comfort, our characters, our brands. And know, we're back to 90% of of production, and we were producing content throughout the whole, pandemic. So and we were shooting a lot of it at much lower prices.

We found that doing authentic content with Joanna Gaines or with Guy Gary or with Micro in their house, that all really, worked for us. And what it the net net of it was when we went into the upfront, our share was significantly up. We're the only player now. This the Scripps deal and the fact that we've really invested in our content significantly when others haven't over the last couple of years, our share is just growing and growing. And, you know, right now, what we put together is not just broadcast equivalent, but we're higher very often than most of the broadcasters, if not number one, on some on on many nights with a with an with an unduplicated reach that when when an advertiser looks at us, they say, wow.

For reaching women, they're better. And now the broadcasters are the traditional broadcasters either haven't been investing or they can't invest now. And so we have fresh content. And so when we looked at it, we said, there really is a win here. We did I believe we I know, you know, that we did better than everyone, but it's more than that.

Our CPMs have been kicking up, but maybe we get an extra couple of points. We established this Discovery Premier package. And, you know, in in in those cases, we're charging dramatically more. So the so the broadcasters are sixty, sixty two, 64, and we're in the forties, the high forties, the mid forties, the low forties. You know?

And we go up 50%, but we have better reach with more original content, with more engagement. And, we found that really the ability to reach women with us and the engagement and the brands and the brand affinity. So I think we did great on the upfront, much better than we've ever done. I think we established all the work we've done over the last three years of saying, here's what we are. Here's why we're more valuable.

In the long run, there's an argument that we should flip If the broadcasters are running mostly, rerun content and we have original content, then why should they be in the sixties and we be in the twenties? You know, if the if the package the core of the package is sports news and us, and we can provide consistent and reliable original content with high engagement, you know, why shouldn't we be in the sixties and they drop? Eventually you know, so I think we're really pushing this issue of and getting a lot of traction that it's a real win win. And, I think John Steinleaf gets a lot of credit. We've we've been working on this for a couple of years, and we're really breaking through.

So and we see it in scatter. We see it in scatter, a lot of strength because we have a lot of original content, and we have a lot of momentum. And

Speaker 2

Michael, on the, your free cash flow cash flow and working capital question.

Speaker 1

Yeah.

Speaker 2

Two things. Working capital, I think the direct to consumer business in and of itself is a little more beneficial because you get paid upfront by your consumers directly as opposed to the TV cash cycle, which, as you well know, includes some very long payment terms with the traditional business partners. So that's a positive. From a higher level for the free cash flow overall, obviously, any start up business, any growth business has upfront investments as we're building scale to monetize the structure that we're putting in place upfront. So but as you know, we've been working on this for a few years, very pleased with the progress of the technology platform.

So that's an area where we have a bit of a head start. We've also been hiring personnel. We've been producing content, as you know. The big swing factor and the big variable factor for any future expansion is really subscriber acquisition costs. And here, we will be willing to get behind anything that's really successful from a customer lifetime value perspective.

And clearly, there is a lot of variability in there. And there's also a little bit of the more successful you are, the more growth potential and growth you're seeing, the more you're spending against it. But again, if you take a step back, I'm very, very confident in this company's ability to generate free cash flow. And investing in our own organic growth is our one priority, so we'd be willing to get behind that.

Speaker 7

All right. Yes. But it

Speaker 1

doesn't sound like when we look

Speaker 7

at other companies' pivots, the cash flow has been really, really consumed by the pivot, but it sounds like this is more manageable for you given the investments you've made so far.

Speaker 2

That plus again, I mean, we've been saying this all along. We're also just operating in a very efficient model with our global truly global footprint, the platform in place, and, very efficient, content joiners. So, yes, we should be we should be better off than others.

Speaker 1

And we think, interestingly, that this grand experiment of that we're all, unfortunately going through here with the pandemic, and operating remotely, we've learned a lot. And we've also learned, you know, on the content side, how we could produce content for less, how that content can be more engaging and more compelling, how do we produce content, you know, the fact that we're 90% back, in production. And in the overall cost of our company, we think that there's real opportunity. And you started to see you see it in the numbers. You're gonna see it further.

It's it's revealed real opportunities for us, to continue to reduce, costs in way that's ways that shouldn't affect performance or investment in content. Investment in content in the context of having the the amount of original content that we need. We may be able to reduce investment because we could produce for cheaper and use that investment as we pivot to substantial exclusive content for our global platform direct to consumer.

Speaker 7

Thanks, guys.

Speaker 3

Thank you. Our next question comes from Jessica Reif Ehrlich from Bank of America. Your line is open.

Speaker 8

Thank you. Just a couple of questions. First, you've been really aggressive on the cost side, it's obvious in these numbers as well. But you've seen maybe under the cover of COVID or just because the industry is transforming, you've seen a number of media companies announcing really significant reorganizations over the last couple of months. How do you think about the structure for discovery?

Is there room to continue to how are you thinking about that? And then separately, David, you mentioned the Sky direct to consumer offer, which we believe is a rebrand of Deep Play as Discovery plus in The UK and Ireland, and you've added a subscription to Sierra. What's the rationale for rebranding the service, and, you know, how did you decide in that four ninety nine pound price point?

Speaker 1

Okay. Thanks so much, Jessica. There has been a lot of restructuring, and I think that's a certain strategy of viewing all IP as one set of IP. IP is IP is IP. We don't believe that.

We have a team that produces food content. We have a team that produces crime content. We have a team that produces natural history content at Discovery. And we think we got the best teams. They understand the brand.

They also know the best producers. We have the best producers engaged. We own a lot of the production companies with Mike Fries, with all three. And we think this this idea of continuing to invest in great creative people, great content, and having them understand Elaine better than anybody else. You know, the idea of, you know, producing HG right now has never been stronger.

Kathleen Finch is one of the, you know, the best creatives I've ever worked with, and she's got a great team. The idea of dismantling that team and saying, okay. Let's just produce shows. I think that may be good for cost, and it it it may work out if you're just doing broad entertainment and you're taking, you know, pitches. But for us, it's working for us.

And I think it's gonna really drive continue to drive this the the the two engines that we have. One is our existing platforms. You know, outside The US, we're seeing some real strength in the traditional ecosystem. And our share is growing, and we're doing very well, and we're generating massive free cash flow domestically and internationally. So we're not running from that.

We think we're gonna be able to get better pricing, as I've said. We're getting more share. If news calms down, we get we may get a lot more. And as these other companies decide, you know what? Let's kind of let's move away from this platform.

I think, more and more people are going to what's really sticky, and consumers can see where people are investing. And so I think that we're gonna get a real benefit from that. Having said that, I think we can save a lot of money, but we're not gonna do it in the area of content and because it's gonna pay off on both. The great content that we can create, we're learning a lot about what people want so badly that they'll pay for it. And how do we create you know, and where do we put content?

We'll make those same decisions, and we'll talk about that in December. And we've been at that now for a very long time quietly, But we think great content is what our company is about and owning it globally. That is what Discovery is, and that's what we're a global IT company. And, we're not a distribution company. And so it's not a sidecar for us.

It's what we do for a living. We'll talk in December about what we're doing. You can get a little bit of a hint of it in with Sky. We think that a global platform that we can that we can promote on our 10 to 12 channels, free to air and cable around the world, that we could have a mix of content that's truly unique with with with huge scale, is going to to pay a big benefit for us and will differentiate us locally and globally. And Sky is just a piece of that strategy, and we'll explain more of it in December.

Speaker 3

Can I just ask The one follow-up to

Speaker 2

only thing I would add, David, is, Jessica, maybe less publicly, but clearly, the closing of the Scripps merger, we have done some pretty significant reorganizations that have helped us achieve the performance that we have, and we feel very good? But it's been there's been a lot going on.

Speaker 8

No. You've clearly cut costs, not even a question. And then just follow-up on what David just said, and everyone's trying to come at it from different ways. But we know that you're going to talk to us in December about your strategy. But on a higher level, can you give any color on how you're thinking about you know, SVOD versus AVOD or a hybrid strategy?

Speaker 1

Well, we're we're in the AVOD business here in The US with, with our Go product. We'll talk to you a little bit more in December about that. It's going that has gone very, very well for us. We've been in the market with advertisers, with the upfront, with that product. We think we're gonna improve that product, in many ways significantly that'll have some that'll have some real opportunity for us.

Ultimately, you know, I think that getting we need to get our content in front of everyone everywhere in the world, but we'll we'll take you through what that balance is and which piece of that we're gonna go at hard. We've thought about it a lot. We've already been added a lot, and we'll give you the detail in the backup in early December.

Speaker 8

Thank you.

Speaker 3

Thank you. And our next question comes from Ketan Mural from RBC Capital Markets. Your line is open.

Speaker 9

Great. Thanks for taking the question. I wanted to ask about U. S. Affiliate revenue trends.

Between the pricing visibility you have following your recent renewals, potential upside from the new bundles like the entertainment only tier on T Mobile's TVision, and with what appears to finally be some relief on the pay TV sub decline trends, how are you thinking about the sustainability of the recent, affiliate revenue strength looking out to the medium term, perhaps into 2021? And just on T Mobile, I thought your commentary over there was pretty interesting. Sounds like there's some friction with how programming lineups ended shaping up, but one could argue that the entertainment only tier was a major win for you. So I'm just trying to first better understand that relationship, and second, see if you think we'll see further changes to how linear bundles are structured as you lean into your DTC strategy. Thanks.

Speaker 1

Sure. Thanks so much. Well, look, we were encouraged by Tom Rutledge's performance. I mean, it's pretty compelling. He's running a hell of a company, and, the beneficiary is the country getting more access to broadband and turning the the the the corner on on cable subs.

Comcast had a very good quarter. So it it feels like, sports was off the platform. We had we were in the middle of a tough pandemic. People were maybe saying, you know what? Let me go buy Netflix.

Maybe that's good enough. It's hard to predict these things. The good news for us is we're on all platforms, in and and we probably have the best carriage in terms of skinny bundles. Our content has never been stronger. Our scale has never been higher.

And we've done very well in all of our renewals and getting everything carried. And so what looks like it may be a stabilization, is very good for us. On T Mobile, I think I've said enough. In the end, you know, our our stuff is carried on the broad platforms, and then it is good for us. If in addition to that, someone wants to take the great content that we have and, and offer it in a smaller bundle for less money, that's good, but not that way.

Speaker 9

Understood. Thanks so much.

Speaker 3

Thank you. And our next question comes from Michael Morris from Guggenheim. Your line is open.

Speaker 10

Thank you, guys. Good morning. Two questions for me. First, I'm curious how you're thinking about the implications of, an increasing amount of peer content on these free ad supported over the top services. Do you think that populating those is creating sort of a growing threat to maybe the existing economic model?

And and as you think about your products going forward, just how you think of the balance of having, you know, your own controlled app environment versus selling your branded content to third parties like Pluto or Tubi, Roku Channel, guys like that? And then second, maybe just a little bit more specific on the investment in content going forward, particularly into the D2C launch. Are you expecting a meaningful step up in your cash spend into 2021 to support the product portfolio? And you talk about the value of the library and how that can support you. Maybe how is there a way to quantify how much that library, that deep library you have can benefit you in terms of, you know, how much content you're able to, to serve the consumers?

Thanks.

Speaker 1

Thanks a lot, Michael. Look. There is a lot of pure there is a lot of content out there, AVOD, SVOD. The good news is that there seems to be a a big appetite. One of the challenges is curation.

You know, the idea of, hey. Here's more, and here's more free. I think in the end, people don't just want more stuff. They want stuff they know. They want stuff they love, and they need to be able to curate it.

I think that, that Eiger has been quite clever. In some ways, it's it's a little bit retro, but it's quite clever in with with the very successful Disney plus. If you look at it, you know, I'm an old cable guy. And when people watch cable, it works because of curation. Everyone has their favorite six channels.

It may be 200, but everyone has their favorite six. When you look at Disney, you see those handles. You see Marvel. You see Star Wars. You see Disney family.

It's very clever. They're always together. And it says in a blaring light, we're not just a whole lot of stuff. Those are those are handles where you can come in and see the stuff you love, and it's almost like those are the those are the five channels. And so it's it's quite compelling.

I think the challenge the marketplace is having is they're just a huge amount of content that's the same, movies and scripted, and they're they're kind of yelling above each other. Hey. I got this new sir this new series. Well, it's hard. Here it is.

Here's what it's about. Here's who it's starring. And so in some ways, I think it's very good for us that the marketplace is getting driven with a huge amount of dollars, and people are getting more and more used to paying and going to content and consuming it on all platforms. That's really good for us. I think what's what's even better for us is that that all that stuff looks the same, and it's very expensive to market.

You know, you have to explain what the series is about, who's in it, why they should wanna see it. They already have all this other stuff that looks a lot like it. So we'll take you through it, but we think that our library we sell very little. We've been holding our content for for for this moment for a long time, and we're gonna go very well with everyone. We're gonna look very different than everyone.

And, when people see our brands and our characters, they're gonna know very well, you know, who we are and whether they like us and whether we have real value. And I think there'll be a lot of comfort in looking at us and not saying, oh, no. Another fifty thousand hours of content. They'll look at us and go, I think that's the stuff I love. And, we'll talk to you about it in December.

Speaker 2

And Michael, from the perspective of the content cost or investment development, again, for it's too early for guidance for 2021. What I will say is we are willing to get behind in investment if we see a strong ROI for us as we have in the past. But that said, to your point, there is a lot of value in our library, and not only the library, but also the current content output in our traditional ecosystem that's already existing, eight thousand hours a year, that obviously any new product could tap into as well. So again, as I said earlier, I think our profile will always look better with less cash burn than what others are maybe able to do.

Speaker 1

We're just we just take a look at what we have, and we've been holding on to it. And this idea that you can sell your content outside The US, you could sell some of your best stuff to other players and still do well, you could sell some of your best stuff to three other players and then come out with what's remaining of that and do well or have your stuff be nonexclusive because a lot of other people have it, You know, those strategies may turn out to be good. You certainly make more near term money, but, we think it's dilutive, and it's confusing.

Speaker 7

Thank you very much.

Speaker 3

Thank you. Our next question comes from Kennen Venkateshwar from Barclays. Your line is open.

Speaker 11

Thank you. This is David Joyce for Kennen. Your advertising front, you're ahead of expectations in the quarter. Could you provide any context on what the digital strategies have done for you there, be it from the Discovery Go apps or from your targeted advertising efforts? And also wondering what that opportunity set is going forward.

Is that opening up the advertiser base for you? And then just one final thing on the upfronts. Given the timing shift and the advertisers tending to seek for a calendar upfront, is there any structural implications for for moving to the the calendar upfront for the broadcast? Thank

Speaker 7

you. Thanks, David.

Speaker 1

We are doing very well on the digital side, and our pricing is very good. We've been taking those dollars on Go, and it's been strong. We'll talk to you more in December about how we think we could take more advantage of that. October, as we said, October was flat. November feels good.

And, I think unlike maybe many of the others, we did have some political, but it wasn't in the top five of our advertising. I think we've been doing well because we're a lot more confident on what we have in the marketplace and the value that we present. And we've been we've been doing very well in scatter on pricing. We expect that to continue. And we've been, you know, we are forming this alliance with with many of the advertising agencies that, you know, that are looking at the restructuring and saying, you know, who's still doing a lot of original content that's dependable on this platform?

Where's the engagement? And and what's the pricing? And so I feel like we're breaking through on that. And on the upfront, the upfront was very healthy for us. There was some talk about the upfront really changing dramatically.

I think there will be a calendar upfront, but the upfront was quite healthy.

Speaker 11

All right. Thank you.

Speaker 3

Thank you. Our next question comes from Steven Cahall from Wells Fargo. Your line is open.

Speaker 12

Thanks. First, I just wanted to follow-up on CutGun's question. It sounded like your sub decline improvements were more idiosyncratic than industry, and we've certainly seen some MVPD recent reports looking a little better. So just wondering if everything is equal, going ahead, we would have even further improvements in your universe sub declines just driven by some of that MVPD improvement? And then relatedly, we've definitely had questions about whether or not you've got unusual amount of pricing lift this year with these new renewals.

So just wondering if you could comment on whether that's correct or whether the kind of percent we're seeing now is more like a decent run rate for domestic affiliate going forward. And then just on the DTC side, I know there's a lot that's going to come in December. Golf TV is a product that's already in the market. So I was wondering if you could give us an update on how Golf TV has performed so far this year. I think you launched it in a couple of new markets.

Speaker 2

Let me start with the two affiliate questions. Again, I don't want to speculate about some trends. Again, we're happy to see a slightly better number this quarter. Certainly hope that might be the case for a while, but really not in our control. What is in our control is the degree of carriage that we're getting.

And as David said, in all the recent renewals, we've been getting very good results here. So there were some talk in the market about potentially getting tiered or losing carriage per networks. None of that has happened. And again, we closed two more deals today and in this quarter that we talked about today. And if you look at our reported numbers, you see the 2% growth, 4% sub declines on the core net.

So you can kind of do the math of what our underlying economics are. And as we've said previously, we're very pleased with with the deals that we've built this year, that are supportive, for this environment.

Speaker 1

One point on the you know, there's always a balance when you do these deals. You know, it it it we're pretty well protected, which is which is our benefit and the distributors benefit that we're carrying on all tiers, that we're carried broadly. And, you know, we may have you know, even though we got significant increases on all of our deals, maybe we could have gotten a little bit more. But in the end, from our perspective, getting that full protection, and Mhmm. I think that that was also something that was easy for the distributor to give.

On Golf TV, between golf and cycling and the Eurosport player, we've been gathering data and information. We we also have a lot of these other niche products that we've been offering. We'll talk to you in December about what we've learned, how we think what we've learned, and where we're really accelerating and where we're finding it's a little harder, and the balance with some of these platforms with AVOD where people come in and could spend a lot of time, and then versus and then have another tier where they pay on some on some products, like, some of the niche products that we have. And whether niche really in the long term is with some, it might make sense. With others, we might be better off putting it all together and having a very unique offering.

And we'll talk to you about what we've learned about that and why we're we're we have this aggressive strategy that we're taking global in December that we'll talk to about in December.

Speaker 9

Got it. Thank you.

Speaker 3

Thank you. And we'll take our final question from Ben Swinburne from Morgan Stanley. Your line is open.

Speaker 6

Thank you. Good morning. David, I guess just to wrap up on D2C and again, I know you want to save most of this for December. But one of the things that has clearly been a point of tension in the market with your distributors is launching a product that might compete with what they sell. I'm just wondering if that if we're sort of past that now.

I mean, if you look at obviously, CBS All Access has been in the market for a while. It's a pretty direct competitor with CBS Network, AMC Plus launched recently. Do you think we're beyond that issue with your distributors and now there's much more alignment? And secondly, the Scripps deal has been so transformative for the company, I'm sure you'd agree, in a variety of ways. And I know there aren't other Scripps out there.

But you generate so much cash flow, have balance sheet capacity. I'm just wondering if you think you'll be more active in M and A over the next couple of years as you build scale because it seems like you've got a lot of infrastructure, you have a lot of library content. And there aren't gonna be 20 global d to c companies, I'm sure you'd agree. So if you're thinking about being more aggressive in that front. Thanks a lot.

Speaker 1

Thanks, Ben. Well, I certainly would agree on the Scripps deal. Ken Lowe is brilliant. He's a real entrepreneur. He built HGTV from nothing.

He took food, which was a free service, and enhanced it and invested in it. And he built a hell of a company with great leadership. We're very lucky he's still on our board. He's been a close friend of mine for thirty years. I've learned a ton from him, and he continues, you know, to lean in with us.

It's one of the big benefits that we have. We've become one company. We when we bought it when we bought Scripps, we were generating 1,400,000,000.0 in free cash flow. They were generating 650. And we, maybe we were one three.

And we said we thought we can get to a billion. Eighteen months later, we had over an incremental billion in free cash flow, and it's been sustained in an aggressive way. Our share has grown dramatically. We've taken all the great creative leaders that Ken brought, and we took that content and took it around the world, some channels, some on platforms. What it showed was in eighteen months, we went from 4.7 times levered to below three and a half.

Speaker 7

We

Speaker 1

we if the right asset came up, you know, there's nobody that has more synergy than us. We're in every country. We we we you know, even the fact that we have channels in every country, free to air and cable, they're not just channels now. They're marketing machines for direct to consumer. They're marketing machines for product, and we have infrastructure everywhere.

And so, you know, what we learned is we can do it. We can do it quick, and we can do it while we're growing our business. Having said that, we have a hell of a global IP company right now that's hugely differentiated from everyone in the marketplace. The marketplace is behind schedule in getting in in in feeding their IP. So we're we've we never shut down our IP production.

We we learned that we could produce for less more authentically in, you know, in during the pandemic. We're back up in business, and, we have a hell of a hand right now. And we're against a load of players that don't have local, can't expand outside The US until they get local, or can't afford to get local. And a lot of what the content that they have looks very much like what everyone else has. And when something comes up, they all bid on the next big item.

And so we come out with an educated marketplace, very, very differentiated. And with the amount of free cash flow our existing business is generating and growing in market share with pricing that that looks really pretty compelling on the advertiser side because globally, our share and our performance is being recognized. It looks like we got this free cash flow machine that's way outperforming globally, and we got all this IP we've been holding on to and all this IP we've been producing and quietly holding on to. And so I don't think we need anything. If something you know, there's a lot of people that might say if we come into you, we'd be more diversified.

There'd be a huge amount of of synergy. But from our perspective, it has to we it has to help us grow a lot faster, or it has to add bill IP that we think is gonna further differentiate and further scale us. So I think right now, we got a hell of a hand and, you know, we think. And, when we'll take you through it in December. And when the when when we take it around the globe, we'll see if we're right.

Speaker 6

Thanks, David.

Speaker 3

Thank you. And that does conclude our question and answer session for today's call. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.