Warner Bros. Discovery, Inc. (NASDAQ:WBD) Q3 2023 Earnings Call Transcript

Warner Bros. Discovery, Inc. (NASDAQ:WBD) Q3 2023 Earnings Call Transcript November 8, 2023

Warner Bros. Discovery, Inc. misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.09.

Operator: Ladies and gentlemen, welcome to the Warner Bros. Discovery Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 welcome to Warner Bros. Discovery’s Q3 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I’d like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance. These statements are made based on management’s current knowledge and assumptions about future events and 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 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. A copy of our Q3 earnings release, trending schedule and accompanying slide deck will be available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

David Zaslav: Hello, everyone and thank you for joining us. Let me start by saying that we are hopeful we will reach a resolution to the SAG-AFTRA strike soon. We made a last and final offer which meant virtually all of the Union’s goals and includes the highest wage increase in 40 years and believe it provides for a positive outcome for all involved. We recognize that we need our creative partners to feel valued and rewarded, and look forward to both sides getting back to the business of telling great stories. As the strikes underscored, these are challenging times. Our industry is facing accelerated disruption and a rapidly changing marketplace, and to succeed long-term, we must be flexible and adaptable and have a strong arsenal of assets that will enable us to maintain momentum amidst ever evolving consumer behavior.

And at Warner Bros. Discovery, we are and we do. Over the last 19 months, we have been relentlessly focused on reinventing this company, repositioning it as a more stable, efficient free cash flow generating business. While we are and always will be a work in progress and while we are thoughtfully navigating industry wide challenges like a strained advertising market, our teams continue to execute on our strategy. More broadly, we generated over $2 billion in free cash flow in Q3 and are on track to meaningfully exceed $5 billion for the year. This has made it possible for us to aggressively pay down our debt, which we’ve reduced by nearly $12 billion since launching the company last year and as we’ve said, by the end of the fourth quarter, we will be meaningfully below 4 times net levered.

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Q&A Session

While paying down debt and delevering will remain a top priority for us, we’re also now in a position to allocate more capital toward growth opportunities. Our asset mix, one of the most complete and diversified in the industry, positions us as well as any to drive long-term value. We possess the full slate of production and distribution capabilities as one of the preeminent makers and sellers of content in the world. And as you know, we are home to many of the most iconic brands and franchises in the history of entertainment. Of course, we believe the real power lies not just in the storytelling, IP, brands and franchises, as formidable as they are, but in the opportunities we create as one company to maximize their impact, reach and ultimately their value.

As I said previously, a lot of our most popular IP has been underused. There are great new stories waiting to be told and exciting new ways to bring those stories and characters to life across screens, consumer products, experiences, and more. We recognize that we can do a better job of managing and maximizing the value of our blue chip franchises like Game of Thrones, Harry Potter, and Superman. Each represents an ecosystem of storytelling possibilities and we intend to capitalize on their potential with a more focused franchise management approach and look forward to bringing in a new global head of franchise as we discussed two weeks ago. This person will work closely with the leaders of our businesses to identify opportunities to expand the reach and impact our storytelling IP across the full range of consumer touch points.

More on this soon. One of the big advantages we have at Warner Bros. Discovery is that we own and control all of our content and storytelling IP and that allows us to distribute it in ways that maximize reach and profitability. Of course, the top priority for us is our streaming service Max. We continue to be very pleased with the strong foundation that JB, Casey and the team have put in place to first stabilize and now grow the business. In Q3, we generated another quarter of positive EBITDA behind both distribution and advertising revenue growth. And we recently layered in live programming underpinning a broad content offering that appeals to a wider spectrum of consumers and is showing increased engagement and lower churn. And while the third quarter subscriber numbers were impacted by one of our lightest original content schedules in years, in part due to the strike constraints that compelled us to delay some releases, as well as a further decline in the overlapping Discovery Plus subscriber base, which we expected and discussed with you.

We are very excited about our more robust content slate as we head into the strong 2024 and beyond. We’ve got a fantastic lineup planned, including the new season of True Detective: Night Country with Oscar winner Jodie Foster, which will premiere on January 14, followed in the spring by the new limited series The Regime, starring Oscar winner Kate Winslet. Later in the year, we’ll see The Sympathizer an espionage thriller based on the Pulitzer Prize winning book by the same name, produced and co-starring Robert Downey Junior.

BatVerse: And in 2025, we’ll have brand new seasons of The Last of Us, Euphoria, White Lotus and more. We’re confident this great new content will further fuel Max’s popularity, both domestically and around the world. Coupled with our new live programming, it really does provide an exceptional offering for consumers. In October, we launched CNN Max, a 24/7 streaming offering with live news, analysis and original programming from the most recognizable news brand in the world. And while CNN is a strong linear asset, we also appreciate there’s a segment of the population, mostly young people, who don’t subscribe to cable, and this new streaming product appeals to them as well, as evidenced by CNN Max viewers being nearly 20 years younger than traditional linear viewers and the vast majority of our CNN Max viewers being non-pay TV Subs.

We are analyzing everything we’re learning in these early stages and we’ll continue to iterate and improve the offering. But the key takeaway here is that we saw an opportunity and we were able to pivot quickly, seamlessly and decisively. And by providing CNN Max on the service, we’re expanding our audience and our impact. The fact is what CNN does has never been more important or more impactful, and no one does it better. In my view we have the very best journalists in the business. Right now we have over 70 people on the ground across Israel, Gaza, the West Bank and Lebanon and we’ve also got teams in Ukraine. They’re in harm’s way, working around the clock, reporting on these conflicts. And our teams bring not only their news reporting skills, but their deep knowledge of the regions, the geopolitical actors and the conflicts to bear in a way that really benefits the audience.

If you go to the White House, the Pentagon, the State Department, Congress, Embassy Row, CNN is on and it’s on in homes across the U.S. and everywhere across the globe. Our new Chairman and CEO of CNN Worldwide, Mark Thompson is in the seat now. He has visited nearly all of the offices and has already spent considerable time with leaders and employees. We couldn’t be more thrilled to have Mark at the helm. CNN is coming off a strong month in October with our new prime time programming lineup off to a very strong start and audience levels for the U.S. network up double digits year-over-year in key demos, while also outpacing the competition on both linear and digital platforms where CNN remains the number one digital news outlet in the world.

We’re excited to build on this momentum. We also launched Sports on Max last month with the Bleacher Report Add-On Sports tier which will include over 300 live sporting events annually starting with the Major League Baseball post season games which were incredible and now NHL and the NBA through the playoffs as well as NCAA Men’s March Madness, U.S. Soccer and more. It’s a huge advantage for us to have live sports and news together with our bouquet of scripted entertainment, nonfiction and one of the best TV and motion picture libraries in the world. Not only does this make for an even better offering for consumers, as evidenced by the millions of subscribers who have enjoyed our sports and news offering in only the first few weeks, but it’s also helping habituality, which is the most strongly correlated influence on churn.

Similar to news, sports is bringing in an incremental and younger audience with Max viewers, on average 12 years younger than traditional linear. We’ll be launching Max in Latin America in the first quarter of 2024, followed by the Nordics, Iberia, Netherlands and Central and Eastern Europe starting in the spring. The service will launch in France and Belgium in 2024 as well, our first entirely new markets. And in markets where Max will not yet be available, Discovery Plus and Max will be the only place where fans can get every minute of the Olympics in Paris next summer. Lots to look forward to. I also want to remind people that Max and HBO Max are still only available in markets that reach 45% of the world’s broadband households, even excluding China, Russia and India.

And while we will stay financially disciplined in our decision making, we have significantly more growth to come over the next two to three years as we expand to over half of the world where we are not yet available. Looking across our full portfolio, another area where we see particular opportunity is in gaming where we have 11 world class studios and are unique amongst our media peers as both a developer and publisher of games. Research has shown that Gen Z and Gen Alpha prefer gaming to any other form of entertainment, more than social media, more than watching television or listening to music, more than going to the movie theater. Games will be even more important to our fans in the future, and so having this asset in our arsenal is a critical differentiator and a real growth opportunity.

As a developer and publisher, we control quality and enjoy the full economic benefits of the games we produce as well as capturing the broader franchise benefits across the company. In 2023 we’ve released two of the industry’s top 10 console games, including the number one game released this year, Hogwarts Legacy and we still have the Switch version to come, launching next week. Our Harry Potter fans have immersed themselves in Hogwarts legacy, playing more than 700 million hours to date. That engagement helps not only our games business, but also helps build and revitalize the entire Harry Potter franchise and we know our fans want even more. We’ve worked really hard on our games business for the last year and a half. And it’s also a business where we have had a strong track record.

Games have been a very successful and steady segment for Warner Bros. for over a decade. We’ve been profitable in each of the last 15 years averaging more than $400 million in EBITDA the last three years alone. We believe games is a critical and very valuable asset for the company with a great deal of potential for growth. Games has consistently enjoyed among the highest ROIs of any of our businesses. And while we’re smaller than some of the leading pureplay gaming companies, our operating margins are comparable to the best of the public companies. We’re clearly punching above our weight and we’re just getting started. And similar to the leaders in the industry, we’ve led with multiple key franchises, each of which is $1 billion gaming property.

Harry Potter, Game of Thrones, DC, which is mainly Batman today, and Mortal Kombat, whose most recent release, Mortal Kombat 1 has sold nearly 3 million copies since its launch in mid-September. So we’ve got the proven IP and franchises, the world class studios and publishing talent and we intend to continue to invest more capital and more resources into the business. Our focus is on transforming our biggest franchises from largely console and PC based with three-four year release schedules to include more always on gameplay through live services, multiplatform and free-to-play extensions with the goal to have more players spending more time on more platforms. Ultimately we want to drive engagement and monetization of longer cycles and at higher levels.

We have put specific capabilities. We are currently under scale and see significant opportunity to generate greater post purchase revenue. Bottom line, we’ve come a long way in 19 months and have built a very solid foundation for growth. I’m energized by what we’ve done in such a short period of time and even more so than where we are headed as a company. As I said at the outset, our industry is undergoing great disruption and while there are some key factors that are out of our control, like the economy and the impacts of the strike, we do have a very strong handle on those areas of our businesses that we can directly influence. Clearly, there is still much more to be done and our sleeves are rolled up and we’re hard at work. I’m as confident as ever that we have the greatest assets, the strongest creative team and the absolute resolve to make Warner Bros.

Discovery the very best it could be. With that, I’ll turn it over to Gunnar and he’ll walk you through the financials. Gunnar?

Gunnar Wiedenfels: Thank you, David. Good morning everyone and thank you for joining us this morning. I’m very pleased with the strong progress that WBD continues to make across a number of fronts, particularly in light of the obstacles we and the industry have had to navigate, namely geopolitical and economic uncertainty and strike related constraints. We are operating with both greater precision and focus as well as increased flexibility and adaptability.

ex: This quarter, we repaid another $2.4 billion of debt, enabling us to address nearly all floating rate debt that was issued to finance the transaction. In October, we further repaid an additional $600 million of the term loan, leaving only $550 million of this variable and lately higher interest rate debt and bringing total debt repayment since closing up the transaction to nearly $12 billion. We will continue to reduce debt as we generate cash and net leverage will be comfortably below 4 times at year end as previously guided. I am proud that WBD will exit this year with a fundamentally improved financial profile as compared to the beginning of this year regarding command and control, cost structure, profitability and cash flow generation and the balance sheet.

Briefly on our Q3 segment results, which I will as usual discuss on an ex-FX basis. Overall, studios revenues increased 3%. Barbie, the highest grossing movie of 2023 thus far and the highest grossing movie in Warner Bros. history, was the primary driver of segment revenue. Games was also a contributor, which benefited from the release of Mortal Kombat 1 in September. Of course, weighing on this was the impact of the strikes on the production and delivery of TV content, as TV revenues declined significantly, offsetting strong films and games performance. We also face tough comparisons against certain content licensing deals last year. Finally, segment EBITDA decreased 6% in part also due to greater marketing support behind film and game releases.

At Networks, total revenue and EBITDA were impacted by a modest decline in distribution revenue and the continued challenging advertising marketplace, predominantly here in the U.S. where the market has continued to be weaker than we had hoped, while international markets on balance remain more stable in comparison. Looking ahead to Q4, we will be helped by the strong deals we secured for the upfront year 2023-2024 and improving ratings trends on some of our core networks. Taken together, while the market environment continues to be soft, we are expecting an incremental improvement of our network segment ad sales in the fourth quarter. Turning to D2C, we ended Q3 with over 95 million subscribers, representing a modest sequential loss, largely as a result of an extraordinarily light content slate and some expected decline in the overlapping discovery in Max subscribers.

Revenues increased 5% as our core subscriber related revenues distribution and advertising through 5% and 29% respectively, while content decreased 17%. Distribution growth was primarily due to price increases in the U.S. and certain international markets as well as a more favorable subscriber mix as noted previously in wholesale subscribers which have been declining, tend to have lower ARPU’s than retail subscriber. D2C Adjusted EBITDA was positive $111 million representing a $745 million year-over-year improvement helped by both revenue growth and OpEx improvements with cost down 21%. Our D2C team has done a remarkable job improving the quality and financial profile of our streaming business. Only 19 months into the combined operation as Warner Bros.

Discovery and a few months after the launch of Max, we are now on track to at least break even or even profitable across the D2C segment to swing up approximately $2 billion versus last year and very well ahead of our own plan. This is an incredibly valuable asset and provides a strong vantage point for our path to long-term sustainable growth. Turning briefly to consolidated results, revenues increased 1% to nearly $10 billion, while adjusted EBITDA increased 22% to $2.97 billion. Year-to-date, adjusted EBITDA has improved by nearly $1.2 billion year-over-year on a pro forma basis, even with pro forma Networks advertising revenue now down nearly $1 billion in the first nine months of this year and the headwind from the ongoing work stoppage in Hollywood.

We continue to expect that adjusted EBITDA for the full year will be in the $10.5 billion to $11 billion range. Factors impacting where within that range we end naturally include the tone of the scatter market in the U.S., the performance of our three remaining feature film releases in December, as well as the timing of content licensing. Free cash flow for the quarter was a positive $2.1 billion versus the negative $200 million in the prior year quarter, which recall was the first full quarter of the combined company. The nearly $2.3 billion positive swing year-over-year in this quarter alone illustrates the meaningful strides that we have made on all fronts. Admittedly, the swing also includes some benefits from the strikes. So the vast majority of the improvement has been the result of our transformation efforts and relentless focus on efficiencies across the enterprise.

From finding deeper cost synergies with more than $3 billion of incremental cost synergies flowing through this year to driving working capital improvements and far greater discipline on capital allocation. I continue to believe we’re still very much in the early stages of realizing the full benefit of many of these initiatives. I expect full year free cash flow to be similar to the trailing 12 months at the end of Q3, i.e. in this $5.3 billion range give or take with some further strike related benefits balanced against the tough comp in Q4 free cash flow last year when we converted nearly 100% of our EBITDA to free cash flow. Looking ahead to 2024 and with some preliminary thoughts from early stage budgeting, I’d like to provide an initial perspective on a couple of points.

On the positive side, I continue to be confident in our ability to further drive and maintain cost discipline. By the end of this year, we will have realized over $4 billion of cost synergies and we will have already implemented initiatives to deliver more than $5 billion through 2024 and beyond, as I have detailed in the past. Second, with our strong cash generation, significantly reduced leverage, the outstanding results our games business has delivered, the turn to profitability of our streaming business, and the clear value in our ability to drive franchise returns across the company, we see more and more opportunity for investing in sustainable profitable growth. As David alluded to and as we shared with you over the last quarter, as we are planning for 2024, we are examining ways to reinvest at a slightly faster pace into these growth avenues.

This will be most relevant in areas such as marketing support for Max in the U.S. and in conjunction with launches in Latin America and EMEA, including new markets, particularly given the high profile release schedule Casey has assembled and the Olympic Games in Paris next summer. Our disciplined framework centered on rigorous analysis of subscriber acquisition costs, customer lifetime value and return on investment will firmly guide this process and support continued traction and revenue growth while maintaining our focus on longer term segment profitability targets. On the challenging side, it is becoming increasingly clear now that much like 2023, 2024 will have its share of complexity, particularly as it relates to the possibility of continued sluggish advertising trends.

To that point, while streaming advertising remains robust, the state of the overall linear ad market during the second half of this year has been disappointing. And looking ahead, while it is early, the timing of an ad recovery is currently difficult for any of us to predict with any conviction. And finally, as we begin to formulate the initial framework of our TV production business getting back to work into 2024, there is simply a lot we don’t know yet. While we have every confidence that this will eventually ride itself throughout the next year and there should be an eventual tailwind from the end of the work stoppage, this is an evolving process and there is a real risk at this point that some negative financial impact of the strike will extend into 2024 to some extent.

Here’s what these factors mean as we look ahead. We will exit 2023 with great momentum and leverage reduction. We have taken significant financial and operating risk off the table over the last year and we are fully committed to our gross leverage target range of 2.5 to 3 times adjusted EBITDA. That said, taking together the factors just mentioned for an early view on 2024, it is unlikely from today’s perspective that we will hit our target leverage range by the end of 2024 without a meaningful recovery of the TV ad market. We remain hopeful. Indeed, we expect to continue to generate very meaningful free cash flow. Key building blocks to consider for 2024 free cash flow remain #1 around $1 billion tailwind of cash cost to achieve largely going away, #2 lower cash interest expense and #3 further progress in AR and AP driven working capital initiatives, offset by the potential headwinds I’ve noted most importantly, a potential further decline in U.S. advertising and of course, the return to a normal content capital spend, as well as the incremental growth investments I noted earlier.

I remain very comfortable with our leverage and our delevering path as underpinned by the strength of our free cash flow conversion. Looking at our maturities over the next five years, the average amount of debt coming due is below $3 billion per year. Our debt stack is long dated and low cost with the nearly 15-year average maturity and a weighted average coupon of a little over 4.6%. With the vast majority of our remaining debt being fixed, we will be largely insulated from rising rates and in fact, we’ll have increasing opportunity to retire debt at a significant discount. As I stated at the beginning of my remarks, in a very compressed time frame, we have made very significant progress as an organization in what remains a very complex and disruptive period in the industry.

And our transformative efforts have better positioned us to compete, to respond to industry dynamics and to participate with strong operating leverage when the macroeconomic and at market backdrop eventually turned positive. And with the initial phase of integration work largely behind us and the free cash flow engine continuing to fire on all cylinders, we are more focused than ever on driving sustainable and profitable growth that will enhance the financial and competitive profile of the company over the next several years with real upside to shareholder value. Thank you again for your time this morning and now David, JB and I are happy to take your questions.

FX: This quarter, we repaid another $2.4 billion of debt, enabling us to address nearly all floating rate debt that was issued to finance the transaction. In October, we further repaid an additional $600 million of the term loan, leaving only $550 million of this variable and lately higher interest rate debt and bringing total debt repayment since closing up the transaction to nearly $12 billion. We will continue to reduce debt as we generate cash and net leverage will be comfortably below 4 times at year end as previously guided. I am proud that WBD will exit this year with a fundamentally improved financial profile as compared to the beginning of this year regarding command and control, cost structure, profitability and cash flow generation and the balance sheet.

Briefly on our Q3 segment results, which I will as usual discuss on an ex-FX basis. Overall, studios revenues increased 3%. Barbie, the highest grossing movie of 2023 thus far and the highest grossing movie in Warner Bros. history, was the primary driver of segment revenue. Games was also a contributor, which benefited from the release of Mortal Kombat 1 in September. Of course, weighing on this was the impact of the strikes on the production and delivery of TV content, as TV revenues declined significantly, offsetting strong films and games performance. We also face tough comparisons against certain content licensing deals last year. Finally, segment EBITDA decreased 6% in part also due to greater marketing support behind film and game releases.

At Networks, total revenue and EBITDA were impacted by a modest decline in distribution revenue and the continued challenging advertising marketplace, predominantly here in the U.S. where the market has continued to be weaker than we had hoped, while international markets on balance remain more stable in comparison. Looking ahead to Q4, we will be helped by the strong deals we secured for the upfront year 2023-2024 and improving ratings trends on some of our core networks. Taken together, while the market environment continues to be soft, we are expecting an incremental improvement of our network segment ad sales in the fourth quarter. Turning to D2C, we ended Q3 with over 95 million subscribers, representing a modest sequential loss, largely as a result of an extraordinarily light content slate and some expected decline in the overlapping discovery in Max subscribers.

Revenues increased 5% as our core subscriber related revenues distribution and advertising through 5% and 29% respectively, while content decreased 17%. Distribution growth was primarily due to price increases in the U.S. and certain international markets as well as a more favorable subscriber mix as noted previously in wholesale subscribers which have been declining, tend to have lower ARPU’s than retail subscriber. D2C Adjusted EBITDA was positive $111 million representing a $745 million year-over-year improvement helped by both revenue growth and OpEx improvements with cost down 21%. Our D2C team has done a remarkable job improving the quality and financial profile of our streaming business. Only 19 months into the combined operation as Warner Bros.

Discovery and a few months after the launch of Max, we are now on track to at least break even or even profitable across the D2C segment to swing up approximately $2 billion versus last year and very well ahead of our own plan. This is an incredibly valuable asset and provides a strong vantage point for our path to long-term sustainable growth. Turning briefly to consolidated results, revenues increased 1% to nearly $10 billion, while adjusted EBITDA increased 22% to $2.97 billion. Year-to-date, adjusted EBITDA has improved by nearly $1.2 billion year-over-year on a pro forma basis, even with pro forma Networks advertising revenue now down nearly $1 billion in the first nine months of this year and the headwind from the ongoing work stoppage in Hollywood.

We continue to expect that adjusted EBITDA for the full year will be in the $10.5 billion to $11 billion range. Factors impacting where within that range we end naturally include the tone of the scatter market in the U.S., the performance of our three remaining feature film releases in December, as well as the timing of content licensing. Free cash flow for the quarter was a positive $2.1 billion versus the negative $200 million in the prior year quarter, which recall was the first full quarter of the combined company. The nearly $2.3 billion positive swing year-over-year in this quarter alone illustrates the meaningful strides that we have made on all fronts. Admittedly, the swing also includes some benefits from the strikes. So the vast majority of the improvement has been the result of our transformation efforts and relentless focus on efficiencies across the enterprise.

From finding deeper cost synergies with more than $3 billion of incremental cost synergies flowing through this year to driving working capital improvements and far greater discipline on capital allocation. I continue to believe we’re still very much in the early stages of realizing the full benefit of many of these initiatives. I expect full year free cash flow to be similar to the trailing 12 months at the end of Q3, i.e. in this $5.3 billion range give or take with some further strike related benefits balanced against the tough comp in Q4 free cash flow last year when we converted nearly 100% of our EBITDA to free cash flow. Looking ahead to 2024 and with some preliminary thoughts from early stage budgeting, I’d like to provide an initial perspective on a couple of points.

On the positive side, I continue to be confident in our ability to further drive and maintain cost discipline. By the end of this year, we will have realized over $4 billion of cost synergies and we will have already implemented initiatives to deliver more than $5 billion through 2024 and beyond, as I have detailed in the past. Second, with our strong cash generation, significantly reduced leverage, the outstanding results our games business has delivered, the turn to profitability of our streaming business, and the clear value in our ability to drive franchise returns across the company, we see more and more opportunity for investing in sustainable profitable growth. As David alluded to and as we shared with you over the last quarter, as we are planning for 2024, we are examining ways to reinvest at a slightly faster pace into these growth avenues.

This will be most relevant in areas such as marketing support for Max in the U.S. and in conjunction with launches in Latin America and EMEA, including new markets, particularly given the high profile release schedule Casey has assembled and the Olympic Games in Paris next summer. Our disciplined framework centered on rigorous analysis of subscriber acquisition costs, customer lifetime value and return on investment will firmly guide this process and support continued traction and revenue growth while maintaining our focus on longer term segment profitability targets. On the challenging side, it is becoming increasingly clear now that much like 2023, 2024 will have its share of complexity, particularly as it relates to the possibility of continued sluggish advertising trends.

To that point, while streaming advertising remains robust, the state of the overall linear ad market during the second half of this year has been disappointing. And looking ahead, while it is early, the timing of an ad recovery is currently difficult for any of us to predict with any conviction. And finally, as we begin to formulate the initial framework of our TV production business getting back to work into 2024, there is simply a lot we don’t know yet. While we have every confidence that this will eventually ride itself throughout the next year and there should be an eventual tailwind from the end of the work stoppage, this is an evolving process and there is a real risk at this point that some negative financial impact of the strike will extend into 2024 to some extent.

Here’s what these factors mean as we look ahead. We will exit 2023 with great momentum and leverage reduction. We have taken significant financial and operating risk off the table over the last year and we are fully committed to our gross leverage target range of 2.5 to 3 times adjusted EBITDA. That said, taking together the factors just mentioned for an early view on 2024, it is unlikely from today’s perspective that we will hit our target leverage range by the end of 2024 without a meaningful recovery of the TV ad market. We remain hopeful. Indeed, we expect to continue to generate very meaningful free cash flow. Key building blocks to consider for 2024 free cash flow remain #1 around $1 billion tailwind of cash cost to achieve largely going away, #2 lower cash interest expense and #3 further progress in AR and AP driven working capital initiatives, offset by the potential headwinds I’ve noted most importantly, a potential further decline in U.S. advertising and of course, the return to a normal content capital spend, as well as the incremental growth investments I noted earlier.

I remain very comfortable with our leverage and our delevering path as underpinned by the strength of our free cash flow conversion. Looking at our maturities over the next five years, the average amount of debt coming due is below $3 billion per year. Our debt stack is long dated and low cost with the nearly 15-year average maturity and a weighted average coupon of a little over 4.6%. With the vast majority of our remaining debt being fixed, we will be largely insulated from rising rates and in fact, we’ll have increasing opportunity to retire debt at a significant discount. As I stated at the beginning of my remarks, in a very compressed time frame, we have made very significant progress as an organization in what remains a very complex and disruptive period in the industry.

And our transformative efforts have better positioned us to compete, to respond to industry dynamics and to participate with strong operating leverage when the macroeconomic and at market backdrop eventually turned positive. And with the initial phase of integration work largely behind us and the free cash flow engine continuing to fire on all cylinders, we are more focused than ever on driving sustainable and profitable growth that will enhance the financial and competitive profile of the company over the next several years with real upside to shareholder value. Thank you again for your time this morning and now David, JB and I are happy to take your questions.

Operator:

Cahill:

Steven Cahill: Thank you. Good morning. So, David, you’ve now experimented a bit more with licensing, putting some shows on some major streaming partners from the HBO library. And I think you’ve successfully had licensing arrangements in the past such as the deal with Sky. So as you think about some of that really strong HBO content going forward, whether it’s library, whether it’s prior seasons of shows that are returning like True Detective or whether it’s some of the franchise shows like Friends, how do you think about what should be on Max and what can be elsewhere, particularly when there’s partners that are willing to pay a lot and maybe have bigger reach than Max? And then you talked about the engagement that you’ve seen on Max from CNN and sports and Bleacher.

I’m curious whether you think that content sits on Maxwell and justifies the cost and on the sports side, where do you see kind of sports emerging into streaming over the long-term, is it an add on tier? Is it integrated? Are you interested in partnerships with other DTC sports services like we’ve heard from up here? Thank you.

David Zaslav: Thanks so much, Steven. Well, look we’re probably the largest producer of TV and motion picture content and we have one of the largest TV and motion picture libraries in the world. The good news is that on Max we’re getting to see what people use and we get to see where they go first, how much time they spend with it. And so we are in the business of monetizing content through Windows. There’s a lot of content that we see is just for us. This is content that people come to Max for and it’s important and it’s important that we distinguish the Max brand as being the highest quality brand in in this space. And really taking Casey’s content out, whether it’s White Lotus, The Last of Us, all the great hits that HBO is having, one of the great runs that are on Max and taking advantage of that.

Having said that, there’s a lot of content that’s not being consumed heavily on Max, and so those are the easy ones. Everything that we license is always not exclusive. We keep a full, the full rights to all that content and we have it on Max and in some cases we also have it on AVOD. So we really get the Monday Morning Quarterback and take a look. In terms of some of the content that you’ve seen like DC we put those in Windows, so someone might have it for three months or six months. We always have those movies and we have the complete set of all those movies. And candidly we have found, one we won’t do it unless the economics are significant, but in many cases it really helps us. People come back and then they want to see the full bouquet of DC movies and the only place to do that is with us or it enhances the quality of the DC library.

So overall I think we’re trying to figure out exactly how to maximize the value and we debated all the time, I think we’re doing a very good job, but as I mentioned there’ll be a lot that you’ll never see because it just belongs to us. On the News and Sports, look, we’re only six weeks in, but it is quite encouraging that we’ve looked at what happens to the people that spend time watching news and sports and churn is down and engagement is up. In some cases engagement is up meaningfully. The people that are watching in many cases, in the overwhelming majority of cases are people that don’t have pay TV. So we’re reaching a whole new audience and the audiences are younger. With CNN Max, we launched effectively a whole new service and we really geared it toward a younger group of people that are more S5 [ph] digital viewers and that’s what Mark Thompson and the team will continue to work to do.

But I think it’s a real advantage to have the great quality content, albeit for the last couple of months we haven’t had our best content. We pushed off True Detective because we couldn’t have Jodie Foster to promote it and so you’ll see a very strong line up next year. We’re very unique in that we’ll have news, sports and entertainment and library content and we’re so confident that we really want to get behind it in a bigger way. And the fact that we’re now, in this quarter we made $111 million, we said it’s not about how many subscribers, it’s about how much money. And we’re starting to really see that we can generate more economics, but we think we can grow the service in a meaningful way. Finally, I think that the Sky issue was really different.

There were some markets. In that market all the rights were sold to Sky until the end of 2025. There are some markets that we will not go into. In India, we were not making money for a lot of years. We weren’t making money at Discovery. Warner wasn’t making much money in terms of the Warner product and so we structured a deal with Reliance, with James Murdoch and that team. That was a great deal for us and a great deal for them. They get to package all of our content with cricket and some more local content and it will come back to us, it will be branded. So in a few years, we’ll look back and say should we get into India now? But in the meantime, instead of it being a business that we’re losing money in, we’re only making a little, we’re making a lot of money and our brand is being built in India.

That will be the case in a few markets, but we really have ambition now to take Max around the world. We think that — and that’s one of the things we want to invest in. Max and the gaming business as two businesses we think we could really see growth in. Finally, our sports business is meaningful. And for the last several years we’ve seen the advantage of sports on subscription, but we don’t own all of sport. So the idea of being able to put it on our platform is great, but we’re also going to be looking and are looking I’ve been saying bundling is important. I think bundling in terms of the entertainment package is important. The ability for us to get together with others domestically or around the world, I think is a better package for consumers where we could likely reduce churn and get better economics.

I think that’s the way the industry is going to go, and I think that’s probably the way it’s going to go on sports as well, which is good for all of us.

Steven Cahill: Thank you.

Operator: And your next question comes from the line of Jessica Reif Ehrlich from Bank of America. Your line is open.

Jessica Reif Ehrlich: Thank you. I mean, it’s clear you’ve done an amazing job restructuring the company and improving the balance sheet. But as you can see, even from today’s numbers, the persistent headwinds from linear, which is your biggest business. It’s just such a challenge. So as you think through the next few years and you’ve kind of outlined some of the growth areas like games and sports and news, and maybe some of the traditional areas like film and driving DTC with critical IP. I’m just wondering, how are you thinking? Is that enough to offset these linear challenges? And in your conversations with advertisers, which is a big revenue driver, is it coming back to traditional or is it just permanently moving to digital and AVOD and retail? And I guess the last part of that is, you have an amazing library and it is underutilized. So can you help us think through does it show up in film? Does it show up on TV, DTC, et cetera? Thank you.

David Zaslav: Yeah, Jessica, let me maybe take this one. So again, you heard the comments we made on the advertising market, and the reality is so far we’re unfortunately not seeing the improvement in Q4 that I think many had hoped to see earlier in the year. And that’s why, while it’s early to be talking about 2024 and beyond, we felt it was prudent to be transparent about what we’re seeing in the market. To your point, we don’t see when this is going to turn, but what we have done over the past 18 months is, we put this company into fighting shape. And I have no doubt the market is going to come back at some point and when it does, I think we will be able to participate with very significant operating leverage given what we have put in through this transformation here over the past 18 months.

Gunnar Wiedenfels: We’re not giving up. We really believe in linear. And in fact, there was a lot of noise around the Charter deal with Disney. But to Bob’s credit, that deal was structured in a way that’s really favorable for both parties and favorable for the ecosystem. The idea that all of the cable subscribers are now paying a fee for Disney Plus is a positive, as they have said, the churn on that will be very low and the reach will go up and they’ll be able to sell advertising of course, an environment where there is now that is likely to help linear in creating a bridge. And you can imagine a world as we’re redoing our deals or even advance of redoing our deals to get Disney Plus and Max as an additional benefit to the cable subscribers and to be getting paid on each one of those and having – being able to sell advertising against each of those and having lower churn on each of those.

And so I think it was a very innovative deal by Charter and Disney and although it started out noisy and scary, I think it created potentially a very interesting bridge to more scale, lower churn and more stability to linear. We’ll have to see. It certainly is a positive. And so maybe to comment on a couple of the growth opportunities that you mentioned, Jessica, I do think there is tremendous opportunity and I do think we will be able to get behind that. That’s why David talked about shifting the investment focus a little bit. But starting with the games business, we’ve spent a lot of time over the past year going into a lot of granular detail across all of the areas of our capital allocation. And the games business has shown tremendous success, not only from a P&L perspective, really, as David said, contributing hundreds of millions of dollars to our consolidated profits, but also from a return on investment perspective.

I’ve double and triple checked some of the metrics here because it’s such a great investment opportunity. I’m stunned that we haven’t been investing more into this opportunity under JB’s and David Haddad’s leadership here, and I think we have to do more. There’s a lot more opportunity there and we’re going to start tackling that. On the D2C side, again just take a step back here. Over just a year and a half, we’re now looking for this year at a breakeven positive business after $2 billion of losses last year. We’ve right sized the structure. We’ve got a state of the art platform. As David said, we’re coming off of a quarter with virtually no fresh content on the platform. We want to get behind that. When we come back, when Casey’s content comes back to the platform, we want to get behind it.

We know that we can get tremendous returns on our marketing spend behind new content and we will take advantage of that. And I do think we have a real opportunity here. On the film side and the TV production side, as I said, it’s still a little fluid. Unfortunately, we still don’t have a resolution for the strike yet. But clearly that business should be coming back to growth after being a very significant drag in the second half of this year. So a lot that we want to get behind and a lot that I think is going to contribute to growth for the company. And also on the linear side itself, we’re not on the sidelines. I mean, we’re not just standing by and watching. There’s a lot that the team is working on, Bruce Campbell and John Steinhoff have restructured the sales team.

We’ve got more opportunities in dynamic ad insertion. We’ve got more opportunities in utilizing our data. With every additional AdLite subscriber, we’re going to get additional reach, additional scale, which helps on the pricing side. So there’s a lot going on. Again, I decided to be as open about the ad market this morning, as I was because we feel we have to be transparent here. But there’s a lot we’re doing. And as I said, we’re hopeful.

David Zaslav: The other side of growth is stability and sustainability. What we’ve done in the last 19 months, this is turn this into a real company with real professional management and real free cash flow. This is a generational disruption we’re going through. Going through that with a streaming service that’s losing billions of dollars is really, really difficult to go on offense, it’s difficult to maneuver. And with interest rates the way they are, the challenges in the marketplace, advertising, this is when you’re going to see which are the real companies. This is a company that’s generating over $5 billion in free cash flow. We’ve paid down $12 billion in debt. What that gives us is stability and sustainability. And ultimately, in a difficult environment, it’s going to give us optionality, because we’re surrounded by a lot of companies that don’t have the geographic diversity that we have, aren’t generating real free cash flow, have debt that is presenting issues.

We’re delevering at a time when our peers are levering up, at a time when our peers are unstable and there is a lot of excess competitive, excess players in the market. So this will give us a chance not only to fight to grow in the next year, but to have the kind of balance sheet and the kind of stability of a real company, diverse, gaming, TV, motion picture, HBO, linear, that we could be really opportunistic over the next twelve to 24 months.

Operator: Your next question comes from the line of Robert Fishman from MoffettNathanson. Your line is open.

Robert Fishman: Hi, good morning. I have one for David and one for JB or Gunnar. David, given the increased investment that you guys are talking about, how should we think about expectations for content spending, but where you’ll shake out this year and then just early thoughts on if that goes up or down next year after factoring in the video game spending and all the other factors there? Then for JB and Gunnar, given the accelerated profitability in DTC that we’ve seen so far, how should we think about your prior guidance about 2024 and 2025 profitability? And are you more confident in reaching the longer term margins of 20% plus? Thank you.

David Zaslav: Maybe I can start here. So clearly, again from a year-over-year perspective, we’re going to see increases in content cash spend next year just because we haven’t been able to deploy at full speed here over the second half of 2023. But again, if we look at the change in our overall posture for content allocation, there has been a bit of a strike impact, no doubt. But we have also, as you know, significantly right sized our spend across the various genres on the basis of a thorough analysis of return on investment. And some of that was expressed in some of the content write offs that we did early when we combined the two companies. But that’s also led to a reset in our overall capital allocation. And when we say we’re going to invest, that doesn’t mean that all of that has to come on top.

There is an opportunity to reallocate within our very significant and broad content portfolio here. But net-net, as I said a couple of minutes ago, there will be a headwind to free cash flow from reaccelerating content spend next year. And before I pass it on to JB, we stand by our profitability targets long term for D2C. We do believe that this can be a very profitable line of business as a part of an integrated media portfolio. If anything, I have to say, we’re doing better than we thought and we’re moving faster than we thought, which is expressed. If you just compare what we’re doing this year relative to what we guided a year ago, a year and a half ago, we’re well ahead of that curve, which puts us in a position to focus on growth a little more as we go into next year.

JB?

Jean-Briac Perrette: Yes, and I think just to add to it, when we look at the next two years, the things, the levers that we rely on to get us to that financial profile that we outlined a year ago, over a year ago, really is anchored in strength of content, which David talked a little bit about with a much more impressive 2024 and I’d say an even stronger 2025, price you’ve seen us obviously move on price. We’ve had very good results in both minimized churn and great incremental revenue growth related to our price increases around the world, advertising strength through the release of more of the AdLite product here in the U.S., as well as more markets coming around the world. New market launches, churn reduction, which David mentioned a little bit about earlier.

But we are seeing finally some great progress, particularly with the introduction of live here in the U.S. on both cancel rates and auto renew off coming down, which are great indicators. And so we are ultimately we feel very confident that we’re at an exciting moment over the next 12 months to 24 months, particularly as we look at the global rollout starting in the first quarter next year of Max to take this to a whole another level.

Operator: Your next question comes from the line of Rich Greenfield from LightShed. Your line is open.

Rich Greenfield: Hi. Thanks for taking the questions. I think if I look at your D2C segment, you’ve taken a pretty incredible amount of cost out of the business. I wanted to shift and focus a little bit on the network segment. If I just look at the Q3 numbers, I think the cost structure is down to about $2.5 billion between cost of revenue and SG&A. How much room going forward do you have to reduce that? Obviously, Gunnar, you were very open and honest about the state of the ad market and core cutting, et cetera, and just wondering how to think about how much that $2.5 billion sort of quarterly cost base can come down and what are the big levers you can pull and then just. Gunnar, maybe if you could just from a housekeeping standpoint, I think everyone’s just trying to do the math on sort of what you’re implying for next year.

EBITDA, anything you can do. I mean, it seems like you’re pointing it sort know roughly down. But I’m just curious if there’s sort of any sort of range you want to point the street to when you’re thinking about leverage being higher than your target would be super helpful to just understand the thought process. Thanks.

Gunnar Wiedenfels: Yes, Rich, let me maybe start right there, because I did not intend to guide down EBITDA for next year relative to where we are today. The only reason I brought this up is we had guidance out there of hitting our leverage target range by the end of next year. And again, based on the early indications that we’re seeing from how the market is developing right now, I’m just not confident to stand here today and say, don’t worry about it. We’re definitely going to hit that range. Now, if you have a view on ad market recovery, and if you think there is an ad market recovery in 2024, we’re going to have a great year. I’m just not in a position right now to provide firm guidance to that. I’ve laid out some of the building blocks again, a much more profitable streaming business, which we’re going to try to fuel growth.

But again, let me be clear, that doesn’t mean that I’m expecting to start losing money again. We’re just shifting marginally to prioritize growth over sort of the maximization of immediate profit growth. Linear business, the network business, it is what it is. And I’ll talk about the cost side in a second. And then on the studio side, we should be seeing a recovery as the strike hopefully comes to an end. But it’s too early to be any more specific here. To your point on the linear cost base, first of all, I do want to just call out how, what a great job Gerhardt, Kathleen and others, including at CNN, people have done in right sizing the business as we brought these two companies together. And I think we’re looking at a very competitive cost structure, which is one of the reasons why I’m so confident that when the market comes back, we’re going to be participating with a pretty high flow through to profits.

But as I said earlier, we’re not going to be standing on the sideline here and just watching. There’s a lot more that’s in the pipeline. Some of our transformation initiatives, especially on the technology side, just have longer lead times. And we’re still evolving when it comes to, let’s call it, the operational backbone of how we operate our content workflows throughout the company, by the way, not only impacting the network segment, but the company as a whole as well, so there is definitely more opportunity there. And then one other point that I’ve made before is, again, we decided to go with this three segment reporting structure because that’s how David looks at the company and how I think from an investor perspective, you get the full transparency into the different business models and their financial profiles.

But one thing that’s going to be increasingly relevant is managing our content investments and our content utilization across one Warner Bros. Discovery. And that’s one area where so far it’s been a bit of a one way street of the studios and networks creating content that ends up on the streaming platform. Longer term, as that platform grows and drives more revenue and profit contributions, there may also be a flow in the other direction which inevitably will drive profitability of a linear business beyond what we have today.

Operator: Your next question comes from the line of Ben Swinburne from Morgan Stanley. Your line is open.

Benjamin Swinburne: Good morning. A couple of housekeeping. Gunnar, I was wondering if you are able to quantify the benefit to cash flow from the strike this year. I know it’s still a moving target. And then also whether there’s a way to quantify the sort of incremental synergy capture you expect next year versus this year. You had some numbers in your prepared remarks. And then maybe a more interesting question for David. David, the strategy around expanding Max with news and sports seems quite logical and compelling. You’re adding reach, maximizing distribution, ultimately revenue. And it seems like you think the charter Disney read is a positive one, which I just wanted to hear more about because I could also see the other side of the argument, which is taking your core linear IP and CNN, the NBA baseball, et cetera, and putting it on Max could actually cause some consternation on the distribution side of your business.

So maybe you could spend a minute just talking about how you see that glide path working with your Max strategy. Thanks a lot.

David Zaslav: Sure. Thanks, Ed. Well, first CNN Max, not CNN. There are some hours that are simulcast, but it’s largely independently produced for a younger and different audience. And we saw this in Eastern Europe, that it provided real value, reduced churn and provided real value. And the people that spend time watching live content, as JB has said, and we’ve seen it here already and it’s only six weeks in, you spend time watching news and sports that the engagement is higher and the churn is lower. That’s a big deal. Churn is the biggest issue that we face. This is a very compelling service. The churn is too high. So this is an all on attack to reduce churn. Reducing churn also will reduce marketing because we’re out going out and marketing over and over again to subscribers that are coming in and out.

So the idea that a big majority, the overwhelming majority of people that are watching Max don’t have pay TV, and they’re now able to come in and see what’s going on in Israel, what’s going on the floor, on the Hill, it feels like it could be compelling. And the same thing with sports. We saw real big numbers. So overall, we think this buffet, entertainment, nonfiction, as we’ve said all along, the better the engagement, the more people in the family are watching, the better we’ll be. And we still haven’t really been able to crack the kids. We have a huge amount of kids content. When they haven’t been able to crack that, we’re going to attack that as well. So we think that strategy is really differentiates us and we’re going to have to really promote it.

We haven’t been. JB, you’re at ground level here.

Gunnar Wiedenfels: Yes, I was going to add, the only other thing, Ben, is you have to remember HBO and HBO Max and Max now have really been doing the opposite of what the industry has sort of been complaining about, which is for HBO subscribers, we’ve been giving more value to the bundle, not less. They used to get a number of HBO original series and movies. They now, in 2023, get all of that, plus a whole host of library content from Warner Bros. That they never receive Max originals that they never receive. And so our position in the market for years has been providing more value to the cable ecosystem for those subscribers, not less. And the charter deal really creates this very creative path of, instead of having two completely separate ecosystems, the idea that you could have a distributor that’s paying us a per sub fee for discovery+ and a per sub fee for Max.

And both of those being ad Lite is an incremental advantage. It’s an advantage to charter. And they and Bob came up with this creative road forward. But I think, and we think that it stabilizes the ecosystem, but it also is helpful in building more scale. JB, you and I were modeling it out the other day.

Jean-Briac Perrette: Yes. And I think David’s point on scale is exactly right, which is we know this business has always needed reach, and we’re looking, as we said in David, I think in Gunnar’s prepared remarks, the encouraging thing that we’ve seen already in the last month with both sports and news on Max has proven out further, is these customer segments are increasingly complementary versus cannibalistic. And so the age demographic we’re seeing the much younger demo on Max and the non-pay TV, the vast majority of the viewers being non-pay TV subscribers, leads us to believe that these two can coexist and should coexist if we want to be in a reach maximizing strategy, which we do. And so we like the profile of it, and we think we can continue to find constructive ways to work with our traditional affiliates to make it work.

Gunnar Wiedenfels: And we got the cash to invest in promoting it, to invest in taking it around the world, and to invest in whatever else we think we need to grow. I mean, the key element here of this company now, this company is a free cash flow driven company. Over $5 billion in free cash flow, $12 billion paid back so far in 19 months. We said we were going to be less than four times levered. We will be less than four times levered comfortably. So it’s all about, I believe, not only the quality of the content, but what’s the stability of the company. It’s all about free cash flow, who has it and who doesn’t.

David Zaslav: And then, Ben, to just comment on your first two questions, so starting with synergies, again it’s going to get incrementally more difficult to differentiate between what’s a synergy, what’s transformation, what’s just normal cost work. But to recap what I said earlier, I expect $4 billion total synergy to have flown through until the end of this year. We will have implemented initiatives that will generate $5 billion of run rate initiatives, and we’re still going, we’re still adding to the program. And I think that’s the most important point. While we might not be reporting on this in detail anymore, while we might not call it Synergy, we have had a continuous improvement team at work for the past five years. We never stopped after integrating scripts and discovery because the environment around us keeps changing, and we’re making sure that we change faster than the environment around us.

We’ve got a very capable team that’s got five years of experience. We will keep grinding through every cost opportunity in the company, and we’ll keep delivering. And then, to answer your strike question again, this is everything but a precise science, right? But my current estimate for the full year is there’s probably going to be a few $100 million of a negative impact on EBITDA. The TV production business and licensing business is a major part of our studio operation and has been essentially idle for the best part of this year. And on the positive side, at least from a short-term cash perspective, I expect several $100 millions of dollars of positive cash flow flowing through from the fact that we’re unable to deploy capital. Again, that’s a short term point, and those are my best estimates right now.

Operator: And your final question comes from the line of Brett Feldman from Goldman Sachs. Your line is open.

Brett Feldman: Great. Thanks for taking the questions, two. If you don’t mind, David, you obviously see the value in being able to get your streaming product into a deal similar to the one that Disney got with charter. Of course, the trade-off there was that Disney had to agree to drop some channels. So I’m curious if you’re willing to make a similar trade off in order to get that type of distribution and churn improvement for Max. I’m also curious whether that might lead to some cost savings if you were able to arrange something like that. And then Gunnar, you talked about having an average of about $3 billion in debt maturities over the next couple of years. That’s obviously well below the current free cash flow run rate. So I’m curious, from a modeling standpoint, should we be assuming that you’ll not only use your free cash flow to pay down debt maturities, but even go into the open market and repurchase debt at discounts?

In other words, is there any particular reason you would need to sit on cash? Thanks.

David Zaslav: Sure. Let me start by saying we’ve gotten through, including recently, all of our deals with all of our channels being carried. We really do have a different model. We have Affinity networks, HGTV, Food, TLC, Discovery, Animal Planet and we’re investing in TBS, TNT, we’re investing in all those channels. We still believe in linear. And with sports and news, we’re anywhere between 25% and 45% of the viewership on cable. So when you think of what is basic cable, it’s us. And when people think about what they love, the three, four, five channels that they love, it’s us. And we’re not that expensive. We’re not proud of it. But one of the reasons we’ve been able to continue to get increases is because we provide real value.

And we’re one of the few media companies that’s still investing significantly in original content and we’re nourishing our audiences. And if you look at our ratings in the last couple of months, Kathleen’s doing a terrific job. The ratings on our networks are going up. And so we feel really good about our deals. We feel good about partnering with the operators in building and continue to hold on as much as we can to the linear marketplace. And we can make some tradeoffs. There’s a few of our channels that are lighter. We can make some tradeoffs, but I think it’ll be additive. And I think it’ll be a real advantage to us to have somebody else in the marketplace that wants to retail and guarantee a payment of a significant number of subs to us.

Gunnar Wiedenfels: And then, Bret, to your question on the debt side, look, two things. Number one, there’s going to be a lot of cash flowing through here. And to answer your question directly, no, there is no need to sit on excessive amounts of cash. And as we said multiple times, we’re focused on reducing our debt to that target range as quickly as possible. And number two is our capital structure is a real asset. Again, I went through earlier the average maturity, the average interest rates and the trading levels of the debt. And I feel very good about our ability to further chip away at that overall debt quantum and potentially at the very attractive terms as, more and more cash becomes available here.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.