Warner Bros. Discovery, Inc. (NASDAQ:WBD) Q1 2024 Earnings Call Transcript

Warner Bros. Discovery, Inc. (NASDAQ:WBD) Q1 2024 Earnings Call Transcript May 9, 2024

Warner Bros. Discovery, Inc. misses on earnings expectations. Reported EPS is $-0.27957 EPS, expectations were $-0.24. Warner Bros. Discovery, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, welcome to the Warner Bros. Discovery First Quarter 2024 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Additionally, please be advised that today’s conference call 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.

Andrew Slabin: Good morning, and thank you for joining us for Warner Bros. Discovery’s Q1 Earnings Call. Joining me today is David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette, CEO and President, Global Streaming and Games. Today’s presentation 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 may include comments regarding the company’s future business plans, prospects and financial performance and involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on factors that could affect these expectations, please see the company’s filings with the U.S. Securities and Exchange Commission, including but not limited to the company’s most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K.

With that, I’d like to turn the call over to David.

David Zaslav : Hello, everyone. And thank you for joining us. As we kicked off the New Year, our focus was simple. To continue building this company for the future, recognizing that it’s not business as usual, and that we are transforming ourselves for what’s next in an industry undergoing tremendous disruption, largely driven by technological innovation impacting consumer behavior, and we’re embracing that innovation here at Warner Bros. Discovery, with bold and courageous decision making. To that end, we’ve had a productive start to the year, and we are pleased to see positive momentum building in several critical areas. Most notably, Max is gaining subscriber traction in all regions, adding 2 million subs this quarter with our total Direct-to-Consumer subscriber count nearing the 100 million mark, and while our U.S. subs will be impacted by some seasonality, particularly related to sports in Q2, we’re on track for continued robust international growth this quarter and new subscriber highs through the remainder of the year.

We’re also gaining ground in ad sales with an acceleration in Direct-to-Consumer and sequential improvement in linear this quarter, helped in part by a record March Madness Men’s Basketball tournament and steadier overall ratings. At the same time, we’re taking meaningful steps to rebuild our studios as the cornerstone of our storytelling engine, and we’re proud of the recent creative successes that have supported our Number 1 box office share this year, including Wonka, Dune: Part Two, and Godzilla x Kong. We’re excited about the quality and breadth of our future pipeline. We’re also leaning into the ways that new technologies like data-driven systems and AI can improve our consumer offerings and enable us to run our businesses more productively and effectively.

This is one of our top priorities. Regarding the balance sheet, we continue to see tangible results from our focus on transformation and efficiency. Even in our seasonally weakest free cash flow generation quarter, our free cash flow improved by $1.3 billion year-over-year to roughly $400 million in Q1 and $7.5 billion in trailing 12 month free cash flow. We will continue to opportunistically manage our capital structure evidenced by this morning’s debt tender announcement. While we’ve accomplished a lot over the last two years, we’re still just scratching the surface of our long list of to-dos that we see as catalysts for change and ultimately levers of growth for Warner Bros. Discovery. The current media landscape is increasingly dynamic, and in response, we’ve had to make some tough and at times unpopular decisions.

But we are doing what we believe is necessary to best position the company for the future. While transformation success is not easily measured in short-term months or even quarters, we’re very confident in the strength of our assets and believe we will see both strategic and financial progress in the quarters ahead. I’ll briefly touch on a few key operational milestones and objectives as we look out over the near-term landscape. On direct to consumer, this is a pivotal and critical year for Max with an aggressive relaunch and rollout underway that will meaningfully expand our global presence and growth potential. Since the start of the year, we’ve expanded from a single market in the U.S. to 39 countries and territories with the launch of Latin America, and over the next several weeks, we will roll the service out in over 25 additional markets across Europe, including our first new markets, France and Belgium, with more to follow.

We’re launching it ahead of the Paris Olympics. Max will be the only place where viewers across Europe will be able to watch every part of the Olympic Games. Our goal in 2024 is to drive top-line improvements and build upon the profitability we have achieved last year, while positioning us to achieve our $1 billion EBITDA target for 2025 with further growth beyond. We’re off to a strong start with nearly $90 million positive EBITDA generated this quarter, despite absorbing some of the launch cost of LatAm. But more importantly, we’re laying the critical groundwork and infrastructure from which we expect to build a broader and more profitable Direct-to-Consumer segment. Three key metrics underpin our strategic and financial objectives for Direct-to-Consumer.

The first is subscriber growth. As I said, we’re nearing the 100 million mark and see strong indicators of continued growth in Q2 and the remainder of the year. We’re also leveraging our best practices from the U.S. and LatAm rollouts, such as our strongest content slate yet, more partnerships in place to accelerate our rollout, an enhanced subscriber migration experience that reduces one-time churn and more optimized marketing investment. Second, engagement and monetization. Thanks to a combination of stronger content and product enhancements, engagement reached an all-time high, and we are taking meaningful steps to grow it further. The team continues to improve the product to deliver more personalized consumer experience, feature set, and more impactful content offerings.

Additionally, we grew global ARPU 4% in the quarter. This in part reflects a greater mix shift of lower ARPU international subscribers as compared to U.S. subscribers. This quarter, U.S. ARPU grew by a healthy 8%. While we still have lots to do, I am pleased to say the content lineup on Max over the next 12 to 18 months is one of the strongest ever. March was particularly strong with March Madness and Quiet on Set, a huge hit coming out of our ID Networks. In Q2, we’ll benefit from the third season of critically acclaimed series, Hacks, the streaming premiere of The Iron Claw and Dune: Part Two, Champions League in LatAm, and the June 16th premiere of Season 2 of House of the Dragon, which was one of the most successful series in terms of engagement and subscriber acquisition, just to name a few.

In addition to House of the Dragon, over the next 18 months, Max will premiere a robust combination of high-impact global original series, including Season 3 of The White Lotus, Season 2 of The Last of Us, Season 3 of And Just Like That, along with highly anticipated Tentpole original series, including The Penguin, Dune: Prophecy, IT, Welcome to Derry, A Knight of the Seven Kingdoms, a spin-off of the Game of Thrones franchise, plus an ongoing slate of fresh new Warner Bros. theatrical releases such as Godzilla x Kong, Furiosa, Beetlejuice, Joker 2, and more. The third metric is churn, which, while still above our longer-term target, continues to trend downwards, and in fact was at an all-time low in the US at the end of the first quarter. The bituality and diversity of viewing are the most correlated inputs to churn, and we saw continued healthy improvements in both in the first quarter, and with our even stronger content lineup coming over the next few quarters, as well as our ongoing user experience enhancements, we feel confident about our trajectory.

As you know, I have been a big proponent of bundling, and yesterday, together with Disney, we announced a first of its kind offering that gives US consumers the option of an Ad-Lite or Ad-Free package that includes Max, Disney+, and Hulu. The product will go live later this summer, and we couldn’t be more excited. Two of the world’s most storied content companies are joining forces to deliver consumers the best and most diverse offering of entertainment at a very attractive price, and in addition to the unprecedented consumer value this product will provide, there’s real business benefits as well. The modest overlap between the three services means we have an opportunity to drive incremental subscriber growth, and also because the consumers will have to retain all three, Disney+, Hulu, and Max, to take advantage of the price value in the offering, we expect this product will help increase retention and lower churn, and thus support higher customer lifetime values.

Finally, over time, if the bundle gets more traction, we will benefit from increased efficiencies and greater marketing effectiveness. The bundle will go live later this summer and we’re excited about what it could mean for our business going forward. Of course the heart and soul of our company is storytelling and we are using all the formidable assets and the greatest creative minds to tell the best stories in the best ways possible as we strive to return the luster to Warner Bros. pictures. Clearly this takes time and it’s not something that can be accomplished overnight. In the heavy lifting taking place under Mike and Pam’s leadership at Warner Bros. Pictures and under Peter and James at DC isn’t something that you see fully reflected yet in our financials.

However we are confident it will become more apparent with time and in fact we are seeing some strong proof points of our bold, more disciplined approach while we continue working through the remainder of the slate that was in place when we took over the business. Warner Bros. generated more than $1.8 billion in global box office since the start of the year and it was the first studio this year to reach $1 billion in both overseas and worldwide box office. They’ve got a great slate in the works. This morning I’m excited to announce that the team is now in the early stages of script development for the first of the new Lord of the Rings movies which we anticipate releasing in 2026 and will explore story lines yet to be told. Peter Jackson and his long-time writing partners Fran Walsh and Philippa Boyens are producing and will be involved every step of the way.

Lord of the Rings is one of the most successful and revered franchises in history and presents a significant opportunity for our theatrical business. Warner Bros. Discovery’s great storytelling IP including Harry Potter, Lord of the Rings, Superman and many other parts of the DC universe are largely underused. We are hard at work fixing that. It’s a core value and a key advantage for us. We have the characters and stories people love and yearn for everywhere in the world in every language. Unfortunately the studios Q1 financials were overshadowed by the tough comp at games following the great performance of Hogwarts Legacy last year and the disappointing release of Suicide Squad in Q1 in our gaming group. On the advertising front while, total company ad sales were down 7% in the quarter we continue to see sequential improvement Q2 to date led by what we anticipate will be our biggest direct consumer quarter ever.

As we highlighted last quarter and underpinning some of this improvement is the resiliency of international linear advertising primarily from our free-to-air channels in EMEA which outperformed in the quarter with positive revenue growth. This was primarily driven by robust revenue growth in Poland, Italy and Germany. These firmly entrenched legacy broadcast assets continue to serve as highly effective platforms for advertisers to reach consumers. While we just launched our international Ad-Lite offering in LatAm with EMEA soon to come these platforms will be critical to enhance our portfolio offerings. While linear has obvious secular challenges, we continue to see select opportunities. For example, US networks production hubs can be sources of popular high ROI content for both linear and streaming.

This is a benefit we will pursue where it makes sense particularly as a more intelligent Max platform helps to inform how we allocate content budgets across specific genres and verticals. For example, Max’s hit Quiet on Set which I mentioned earlier was created by the team at ID became the most watched title on streaming in its debut week with a massive 1.2 billion minutes of viewing time. The true crime vertical has great traction on Max and by leveraging the production scale at ID we will be able to curate additional series very effectively and efficiently that work across Max and our other distribution platforms. I mentioned AI earlier. We recognize that AI is going to have an increasing impact on society and our industry and we intend to take full advantage to enhance the products and experiences we deliver to consumers and to achieve greater efficiency company-wide.

We are focused particularly on improvements to our ad targeting and recommendation algorithms. Our AI-based understanding of our customers and content are being activated in our product, marketing, and ad sales, which you’ll hear more about at our next week’s Upfront. Since the initial launch of Max, we’ve been using AI and machine learning to personalize content discovery. We’ve continuously innovated to improve our models to present the right content in front of our consumers at the right time. And this is helping us to drive better content diversity on Max. We’ve also been leveraging AI to more efficiently and swiftly identify and optimize ad-break opportunities in our Premium HBO content, which typically does not have natural ad-breaks.

This has enabled us to offer the premium content on our Ad-Lite tier, and it’s also allowed us to create variable ad-load for our content as we monetize it using multiple tiers and platforms. We have dozens of other experiments across a spectrum of areas ranging from corporate and developer efficiency, to marketing optimization and targeting. All this experimentation is guided by clearly defined AI principles. We believe strongly that creativity and the kind of empathy and humanity necessary to create world-class storytelling can only be found in people, not systems. We also believe that AI is another in a long line of technology and tools that will enable creators to innovate and evolve how we tell stories and inspire audiences. Before I close, I want to mention a topic I know is top of mind for everyone, and that’s the NBA.

We’ve enjoyed a strong partnership with the NBA for almost four decades. We’re in continuing conversations with them now, and we’re hopeful that we’ll be able to reach an agreement that makes sense for both sides. We’ve had a lot of time to prepare for this negotiation, and we have strategies in place for the various potential outcomes. However, now is not the time to discuss any of this. Since we are in active negotiations with the league and under our current deal with the NBA, we have matching rights that allow us to match third-party offers before the NBA enters into an agreement with them. With that in mind, please understand that this is as much as we’re prepared to say about this topic today. These are challenging times for our industry.

There’s no question, but the reality is, and I tell my team this all the time, there isn’t a more exciting moment to be in this business. We continue to do the hard work to transform our company to drive meaningful growth in the future. We are positioning ourselves to take full advantage of opportunities that we see around us, and we’re more confident than ever in our assets and our playbook. With that, I’ll turn it over to Gunnar, and he’ll walk you through the financials for the quarter.

Gunnar Wiedenfels: Thank you, David, and good morning, everyone. I’d like to begin by spending a minute or two on the balance sheet and highlighting the key factors that underpin the $1.3 billion positive year-over-year swing in Q1 free cash flow in what is our seasonally weakest cash production quarter and where we typically see more cash outflows than in flows. Namely, number one, the continued benefit from the many initiatives to improve working capital, which we are still in the early innings of realizing. Number two, the more disciplined and analytical approach to content investment and allocation. Number three, meaningfully lower cash restructuring costs. And number four, lower cash interest expense as a result of the more than $6 billion of debt we repaid over the past 12 months.

The primary use of our free cash flow remains delevering the balance sheet. We remain committed to our gross leverage target range of 2.5x to 3x, and I’m confident that we will continue to make progress towards further delivering this year. We paid down over $1 billion of debt during the first quarter, including nearly $400 million from open market purchases at a discount. I continue to view our debt stack as an important and valuable resource. Our weighted average maturity is roughly 15 years with very manageable average annual maturities for the foreseeable future, with maturities in any given year significantly less than what our annual free cash flows have been, even normalized for the strikes. Our debt is virtually all fixed with an average cost of 4.6% in line with the yield on comparable US long-data treasury.

Based on the difference of current market value to book value, reflecting the current rate environment versus when issued, we have a $6 billion asset in our debt stack. And you should expect that we will begin to be more opportunistic in monetizing this asset as evidenced by the debt tender that we announced this morning. We intend to repurchase outstanding debt using up to $1.75 billion of cash. Turning to the segment results, I’d like to provide some brief commentary to supplement the discussions in the earnings release. Starting with Studios, the $400 million plus year-over-year decline in Q1 was primarily due to the very tough comp we faced in games against the success of Hogwarts Legacy last year in the first quarter, in conjunction with the disappointing Suicide Squad release this past quarter, which we impaired, leading to a $200 million impact to EBITDA during the first quarter.

This overshadowed an otherwise very bright spot from the contributions of recently released theatrical films, where we have had excellent traction to start the year. I’m excited that we have broken ground on a significant expansion project at our world class production facility in Leavesden, UK, a great example of where we are making long-term investments at the heart of our company with an attractive return profile. It’s also another example of how our new 1WBD processes are supporting the studio leadership team and combining creative excellence with overall financial discipline, while the studio business will always be characterized by hits and misses. With these more rigorous processes in place, I have no doubt that we should realize more upside for the bottom line with our hits, while reducing the bottom line drag from our misses.

Turning to D2C, we have successfully migrated the HBO Max subscriber base of Latin America over the past couple of months. To be clear, this was no easy feat, with 160 platform integrations that were required to migrate existing subscribers to the new service. This required significant management time and resources, and we transitioned subscribers with better than expected migration-related churn, in part attributable to the best practices from the US relaunch. An important outcome from the LatAm relaunch is the ability to now offer more consumer-friendly pricing and packaging across Ad-Lite, Ad-Free, and Premium tiers, with more flexibility in subscription options and additional paths to monetize the base. For example, installment billing for consumers who are unable to pay the full multi-month subscription price up front.

We will apply a similar approach to customer segmentation in EMEA. Levers of D2C growth include our significant opportunity to further scale the international subscriber base, while improving worldwide monetization. As we push further into this geographic expansion, we are taking a more holistic view of our distribution deals with partners that both distribute our linear content offering, as well as wholesale or our Max streaming service. Thus far, we have in many cases captured greater overall value to WBD while managing the transition from linear to streaming. And with our strong start in Q1, I expect us to remain profitable in the D2C segment during 2024, despite the heavy launch investments, and I remain fully confident in our path to achieve our $1 billion plus EBITDA target for 2025 and our growth ambitions thereafter.

One final note on D2C. Content revenue was down 46% during Q1, and as a reminder, we will have a more difficult comp in Q2, both of which are the product of timing of output deals renewed last year, availability of content, as well as our content utilization choices. Turning now to advertising, we did see sequential improvement both linear and D2C in the first quarter. Total company advertising in Q1 was down 7%, a sequential improvement of 300 basis points, and was supported by a 70% growth at D2C, which is beginning to scale nicely, and where we expect another record quarter in Q2. It also, in part, reflects an increasingly more holistic portfolio approach to monetizing viewership on both linear and Max, supporting our ability to offer our partners incremental reach and more customized ad solutions spanning all platforms, particularly in the US.

The trend in quarter-to-date linear cash pacings in the US continues to improve modestly, even excluding the positive impact of the NCAA Men’s Final Four and the Championship Games. As a reminder, we will benefit from having these games exclusive to WBD this year, but we do not have the Stanley Cup finals, and the exit of the AT&T SportsNet will continue to be a headwind to revenues with marginal profit impact through the end of Q3. Internationally, EMEA continues to be a standout bright spot, particularly in our free-to-air markets. Advertising revenue grew nicely in Q1, and we are seeing a continuation of this trend in Q2. Poland, Italy, and Germany were notable outperformers among the key EMEA markets. In fact, except for the UK and the Nordics, advertising revenues were flat to up in virtually all EMEA markets during the first quarter.

Though materially smaller, Latin America has been and continues to be a different story, particularly given cyclical and secular headwinds in Brazil and Mexico, our two largest markets in the region. And unlike in Europe, where we are a scale broadcaster in several markets, we are more exposed to the less resilient pay-TV ecosystem that is experiencing a more pronounced secular shift of advertising dollars to streaming. With Max now in the region, we have a growing Ad-Lite presence and are better positioned to capture a share of this migration. We look forward to updating you on our progress here, which, while early, is exceeding our expectations thus far. Finally, I’d like to update you on our continuing transformation efforts, where we’ve made enormous progress on capturing cost efficiency throughout the company over the last few years.

We continue to push forward with new initiatives and have added to the pipeline of opportunities. We now see a path to meaningfully exceed the more than $1 billion of remaining cost savings that we had previously guided to, which is on top of the more than $4 billion that we already realized through the end of 2023. I would best characterize these efforts as a continuous improvement mindset, having become muscle memory for the WBD team. We see tangible further benefits from consolidation of real estate, facilities and taking advantage of the great talent across our global capability centers. As well, we see meaningful savings from the ongoing consolidation of one dozen global content workflow systems. As noted, identifying opportunities to utilize AI to increase productivity in all facets of business operations remains a top priority that may drive further upside to our updated cost savings target.

I am proud of the continued progress we are making to best position Warner Bros. Discovery to respond to the changes taking place in the industry. Indeed, this demands us making difficult and bold decisions. We are focused on doing what is right for the long-term health and sustainability of the business to best serve the need of customers and partners while positioning the company to drive long-term shareholder value. Now I’d like to return the call back to the operator. And David, JB, and I will take your questions.

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Q&A Session

Operator: [Operator Instructions]. We will take our first question from Bryan Kraft with Deutsche Bank. Please go ahead.

Bryan Kraft : Good morning. I was wondering if you could share any additional details about the bundling relationship with Disney+ and Hulu, for example. Pricing, how much marketing will be behind it, and how the two companies are coordinating and funding the marketing activities. Related, how has the Max, Netflix bundle with Verizon performed? And will we continue to see additional domestic bundles created? And how about on the international side, are you doing anything yet outside the U.S., or do you plan to? Thank you.

David Zaslav: Thanks so much, Bryan. The bundle with Netflix is doing much better than expected with Verizon. So I think it’s another example where there’s more strength together, and it’s really driven by the need for a change in the consumer experience. We see it in all of our studies and even on a practical basis, talking to consumers. So, it’s just much more efficient. What’s interesting and I think different about the bundle with Disney, is I’ve been saying for a long time, we need to come together ourselves and provide a better consumer experience, a more compelling and exciting offering, or there’ll be other companies will do it for us. There are a lot of great companies like Roku and Apple and Amazon that are doing a terrific job of aggregating services in the quest to provide a better consumer experience.

It’s much more efficient, better ARPU and a much better business if we can do it ourselves. Disney itself is a fabulous company. They, together with us, turned 100 years old this past year. They have some of the greatest content and stories in the world. They’re a global company like we are, and coming together, an incredibly well-run company with Bob Iger. So, coming together for this bundle, Disney+, Hulu, and Max, is really an extraordinarily positive offering. It’ll be priced well, and it’ll be both Ad-Lite and Ad-Free. For consumers in the US, I think it’ll be a really positive consumer experience, and gives us, I think, a real advantage and opportunity. When you look at the marketplace, there’s this question of distribution versus content.

I’ve always felt that in the long run, the best content wins. That’s why we’ve really focused on the creative side of our company, building the TV production business, the motion picture business, bringing the best talent back to Warner Bros. that ultimately and having the best TV and motion picture library. That ultimately, the best content wins. The marketplace right now has looked at the great distribution companies and have assessed that it looks like the distribution companies are going to be the companies that will be the big winners, and those are great companies. But, I believe that distribution companies and great content companies will be winners. That’s why our quest to be the best storytelling company in the world, Disney, as we look over to Bob and his leadership, is an extraordinary storytelling company.

So, I think this will be a great opportunity to provide great content for a reasonable price to consumers in America. And I don’t know, JB, you want to add to that?

JB Perrette : Yeah, I mean, Bryan, just the only thing that I’d add on pricing, as David said, we’ll come out with more specifics, but you should imagine it will be priced very attractively for the consumer. As a reference point, it’s really working off of the Max standalone and the existing Disney+ and Hulu package bundle. So, as a comparative basis, it’ll be priced very attractively for consumers. The second — on the flip side for us, on the ARPU side, it also is a very strong deal for both parties that we feel very, very good about. Obviously not to mention the LTV of those subscribers we expect to be significantly better than what we see today. On the marketing, it’s two pronged. We will have a significant amount of marketing support from both parties, both third party marketing as well as on air and our own platforms driving to the bundle.

At least as importantly, the buy flows and everywhere you see people once they get into the buy flow, whether they’re coming in for the bundle or they’re coming in just for our standalone products, you’ll see a high prominence of the offering across all the buy flows on both sides, both Disney and ourselves. Then on the international side, look, you should expect, obviously, this has been a very big priority for us, as David said, and we haven’t really executed similar. We’ve done a lot of international partnerships and bundles with Telco, Mobile, Broadband players, and as you’ll see us roll out in Europe and as we announced on Tuesday, when we come to markets on Wednesday, sorry, when we come to markets like, new markets like France, we have big partnerships with people like Canal, Free, Orange, SFR, all the big mobile Telco players.

That’ll continue to be our strategy. Then partnerships with other programmers and other streamers, we will continue to explore, and I think you should see that in our roadmap in the quarters to come.

David Zaslav : And one of the advantages that we’re seeing is by having 10 to 12 channels in every country and free-to-air and local content all over the world, we have relationships with all these distributors. And when you saw deals here in the US, this innovative deal that Bob and Chris did with Charter and Disney, those are deals outside the US that you’ll see replicated or already happening. You’ll see it as we launch that allow for a real advantage for the fact that we’re already in business, a real advantage that not only we in business, but that consumers are watching our content and we’ll be transitioning a lot of those consumers to watching us through our Max product.

Andrew Slabin : Great. Let’s go to the next question.

Bryan Kraft : Thanks so much.

Operator: Thank you. We’ll take our next question from Vijay Jayant from Evercore ISI. Please go ahead.

Kutgun Maral : Good morning. This is Kutgun Maral on for Vijay. Thanks for taking the questions. If I can just follow up on the Disney bundle, maybe a high level question. If we take a step back, the content companies entered distribution years ago with streaming, and now we’re kind of going through this re-bundling phase of these services. Between the Disney bundle as well as the separate sports JV you announced a while back with Disney and Fox, you’re clearly placing yourself in a key position in this industry transition. So, I guess the question is, how does this evolve over the next few years and what does this mean for industry consolidation and how you look to invest behind your D2C and linear assets? Thank you.

David Zaslav : We’ve been saying for the last two years that the consumer experience is a real challenge. Ultimately, you got to follow the consumer. Our philosophy is create the best consumer experience and that ultimately the consumer will go to the best content, the best storytelling in the world. And so in order to effectuate that, we’ve pushed for this real direct-to-consumer with no middleman. There are great companies that are doing a terrific job of helping as we make this transition, to provide a better consumer experience. But the ability for us and Disney together to reach out to consumers, it’s a stronger business. We get all the data. We have an ability to work directly with consumers and to work to enhance that experience.

We’re doing that ourselves with Max. The key for us is, we need to be prominent in all of the major bundles, because we want to be in front of all consumers and we think that we have the entitlement as long as we can continue to provide great content, whether its entertainment, nonfiction, sports, news, and we have content in every language. JB?

JB Perrette: Yes, just the only thing I’d add is, look, I think what happened in the 2010’s is the industry went down a very dangerous financial path of trying to invest in every type of content in every genre to try and be something for everyone. And at the end of the day, we know where that led us to. We’re now getting back to all being great at what we do and swim in the lanes that we were great at. Disney obviously is incomparable and a world leader in kids and family. We are world leaders in premium drama, scripted drama, comedy, non-fiction verticals, and we can get back to investing and prioritizing our lanes and our key content. They can do theirs. And synthetically, these bundles allow us to do that while still providing the consumer with a very attractive price for the combination of products, such that they feel like they don’t need to anymore do all the switching in and out of services month-to-month, but rather pay and get an advantage of one price.

And even if they don’t use the service in one month, they still feel like they are getting great value and they might use it the next month. And so it’s got a lot of rationale by pulling these together. It makes us all be able to go back to investing in the areas that we really are great at.

David Zaslav: It does feel like this is a moment, a moment in terms of what the next year, two years will bring. I said a while back that this is a generational disruption. I went through a generation, a disruption not quite as big as this, but when my career started, when the cable business was getting started, that was a real disruption. And as we look at what happens ahead, there likely will be a restructuring of how people view content and there’s a lot of irrationality in the market that’s getting shaken out in terms of the amount of money spent. We said early on, it’s not how much, it’s how good. That’s what we’re focusing on. And ultimately I think the business will look very different in two to three years and it’ll be much better for consumers from our perspective.

Kutgun Maral : Thank you both.

Gunnar Wiedenfels: So the next question.

Operator: Thank you. We’ll take our next question from Jessica Reif Ehrlich with BOA Securities. Please go ahead.

Jessica Reif Ehrlich : Thank you. Maybe following up David on what you just said, the last two years, as you well know, you’ve gone through restructuring while navigating through the massive industry changes. And as you look out over the next two years, and you said there would be some – the industry would restructure. But from a WBD point of view, what do you think the biggest surprises will be? How different will the company look? And then secondly, next week at the upfront, as we all know, can you give us your outlook for both sides, both direct-to-consumer and linear?

David Zaslav: Thanks, Jessica. Look, we’ve spent the last two years, at the very essence has been, the investing community uses the word synergy. The way we looked at it is, we had an opportunity to restructure each business to start over. What does this business look like if we started today, to build a business that will be successful for the future? We did that at Warner Brothers Motion Picture. We did that at Disney. We did that at DC. We did that with Max and HBO. We did it with our channels business, our production business on Warner Brothers Television. And for us, it’s really two tiers. One is we got rid of a lot of content we didn’t think was going to help us. But at the same time, we brought in a lot of great creatives and invested a lot of content.

So it’s, how do we run these businesses efficiently for real free cash flow and drive for growth? But two, creative excellence. How do we have the best content? In this past year, HBO had maybe its best year ever, and in addition to that, Warner Brothers Television has some of the best, highest quality TV production, and we’re looking at our motion picture business now, which we’re feeling really good about. It’s number one to start the year, but we have a lot of great content. So I think it’s that combination. Great content, great creatives, fighting to tell the best stories on every platform, and then running it like a real business. Real free cash flow and real EBIT, and I think those two will drive us for the future. But it all starts with the content.

If our content is great, that’s our mantra. The best content will win and we have to continue to tell the best stories. Upfront.

Gunnar Wiedenfels: Yeah, I mean look, for the upfront, I think it’s a little early. We definitely hope to continue some of the momentum that we’ve seen last year. I would also say that we’re operating in a much more constructive environment this year than we did last year. So hopefully, that’ll be supportive. To your point, Jessica, about the differentiation between D2C and linear, well really one of the things that’s working very well right now is that convergence. The way John and the team take our inventory to the market is fully harmonized now. It’s across platforms, incremental reach. We’re leaning in further. You’ve seen some nice growth rates for our D2C inventory. We’ve got more to take to the market. We’re taking it to the market with more data-driven products, like the – all the announcements that we made earlier and so there should be further opportunity.

We’re just getting started. Longer term, there is definitely more opportunity here. We have been very transparent about the significant monetization difference between linear and digital advertising. David talked about AI a couple of minutes ago. Certainly that should be a helper longer term as we think about our go-to-market here, so definitely some upside. Maybe one thing to add to your question about the surprises here. I think if you take a step back and look at our numbers right now, what we just discussed for the first quarter, we have full conviction that our studio can earn a lot more than it is doing right now. We have full conviction that JB and Casey and the team are on an incredibly successful track. But as we’ve laid out many, many times before, this doesn’t happen overnight, but we’re seeing the sausage making.

We’re seeing how we’re running the company fundamentally differently that’s not reflected in our current and near-term financials, and I think that’s going to be the surprises. As we come through and show you what the D2C business and our content business can do longer term as we come out of the transformation.

David Zaslav: Yeah, when you think about the D2C business in the U.S., we need to fix the consumer experience, and I think these bundling structures that we’ve come up with in sports and with Disney will help to do that. But we’re a global business. We’re in business almost in virtually every country in the world with multiple channels or free-to-air channels. And two-thirds of a mature, if the subscription business is gestationally beginning to mature, come from outside the U.S. So when we launch with the Olympics, we’re just getting started outside the U.S. So when you look at our subs, this is a big moment for us and we think we have a real advantage because we have local content in every market. We have relationships in every market, and this new idea of distributors, particularly in Europe, and as well as Latin America, recognizing they don’t want to get left behind and they are starting to talk to us proactively about moving our content onto broadband.

How can they offer our products in a way, because they don’t want to be the antiquated cable operator. They want to be the cable operator and the channel store as well. So all of that I think bodes very well for our future. You have to be global. This is not a game for U.S.-only companies. Have to be global, above the globe.

Jessica Reif Ehrlich : Thank you.

Operator: Thank you. We’ll take our next question from David Joyce with Seaport Research Partners. Please, go ahead.

David Joyce : Thank you. Following on to the upfront advertising question, you obviously have a long, strong relationship with the advertisers and have been on the forefront of ad tech. I’m just wondering, how you are able to match up your analytics and data and targeted advertising on the linear networks with the offerings that the various digital platforms are doing. Just wondering when that might be showing through, or is it starting to show through as some of this modest sequential improvement? Thanks.

Gunnar Wiedenfels: Well, it’s certainly beginning to shine through, but I think there’s a lot more opportunity. The thing to keep in mind here is we’ve got to differentiate between the traditional linear and D2C advertising. Obviously, on the D2C platform, we are enjoying all the benefits that everybody else enjoys in terms of being plugged into all the key marketplace platforms and taking advantage of data partnerships in the marketplace. But also, on the traditional linear side, it’s important to remember that with the shift in the distribution landscape, we’ve got a much greater share of virtual MVPDs in the mix. That opens up opportunities for us to do targeted advertising with dynamic ad insertion within the linear streams.

Those are some areas where we see additional opportunity. If you take that together with the fact that JB is bringing in more and more at-night subscribers, that drives additional scale. That not only drives inventory, but also a real scale advantage as we increase our reach across the combined platform. To answer your question more precisely, I think it’s starting to come through, but this is going to be a growth cycle, I think for many, many years to come.