Discovery, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery, Inc. fourth quarter and full year 2020 earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and then one in your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star and then zero. I would now like to hand the conference over to your speaker today, Mr. Andrew Slavin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Good morning, everyone. Thank you for joining us for Discovery's Q4 earnings call. Joining me today are David Zaslav, President and Chief Executive Officer, Gunnar Wiedenfels, Chief Financial Officer, and J.B. Peratt, President and CEO of Discovery Networks International. You should have received your earnings release, but if not, feel free to access it on our website at www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we will open the call to take questions. Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations and providing projections and other forward looking statements. The company disclaims any intent or obligation to update them for additional information on important factors that could affect these expectations. Please see our form 10 K. and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Good morning, and I hope everyone is having a great start to 2021. And we thank you all for joining us here today. This is a dynamic time for discovery. The past year has been one of change, challenge, and opportunity. during which we've shown incredible resilience, creativity, and focus as one global team. From navigating the pandemic to generating meaningful momentum towards our strategic pivot, Discovery has responded with drive and determination. This is also a unique time for us, because as we are working hard to solidify our core linear business, in which we continue to meaningfully outperform, we are repositioning the company against the massive new opportunity in streaming. Well, we already see very positive signals and signs that taken together with the durability of our core business will nicely position the company for sustainable long-term growth. Sustainable long-term growth. That is our mission and we are laser focused on deliver. We finished 2020 with strong operating momentum and great command and control across our global businesses, delivering top line improvements across virtually every key operating metric since the pandemic hit, while maintaining strong discipline over our expenses without sacrificing quality or missing a beat in our creative execution. We were even able to return nearly $1 billion of capital to shareholders in equity buybacks. We learned a lot as we managed through 2020, and our tenacity and agility, which is truly at the heart of discovery, took center stage. The impact of our content, either as measured in terms of global share growth or simply in the way people sought us out for comfort and nourishment during a difficult time, became more relevant and more of the moment like never before. We encouraged our talent to bring us into their kitchens, gardens, living rooms, with iPhones and GoPros. And it was a game changer. When most of our peers showed older repeats, we became closer to real and more authentic on air. And that provided a great boost of adrenaline across the company. and our talent partners, and refined our IP all around the globe. And I'm even more excited about 2021 and the meaningful progress we are making in our strategic pivot, while at the same time working hard to support our core linear networks business and reinforcing its importance as a critical part of our total consumer offering. Discovery Plus is off to a fantastic start. And we couldn't be more encouraged by all the early metrics. After seven weeks since launching here in the US, we have over 11 million paying direct-to-consumer subscribers across our entire portfolio. And we will hit 12 million by the end of this month of February. an increase of 7 million net ads as compared to 5 million subs we reported in December. The vast majority of this increase is attributable to Discovery+. And substantially more than half of the 7 million ads are paying Discovery Plus subscribers in the United States. And we are really just getting started internationally. as this comes without adding any new markets other than our previous Dplay markets that we rebranded to Discovery+. For example, we relaunched Italy just a few weeks ago and the UK in Q4 2020, both of which are off to a strong start. Given our ownership and control of all of our content, our increasingly relevant content, expect us to light up markets globally over the next 18 months or so. And in many key markets, we intend to partner with key distributors, such as we did with Vodafone and Sky. These discussions are active and going very well. And our existing momentum is helping facilitate these conversations as distributors remain keen to provide incremental value to their subscribers as a means of leveraging their pipe and de-commoditizing their offering. In both regards, we are a fantastic partner. We bring strong global and local IP at really superior value. We are by far the best value to consumers and distributors in a global SVOD service in the marketplace, helped by our financial model and the fact that we own all of our global IP. The rollout of the Discovery Plus platform has been nearly flawless without any technological disruptions or outages. The Discovery Plus product launched with all major platforms and devices, Roku, Fire, Android, Apple, Samsung, and there's more to come. And we came to market with an ambitious slate of over 1,000 original hours over the coming year. Stay tuned for further delivery partnerships, such as partnerships with cable operators and other connected TV platforms, all of which move us further along as our goal to be among the most widely available platforms to consumers everywhere on the globe, with easy access to consumers in every language. Importantly, consumers love the Discovery Plus product. And it shows with all key operating metrics pointing in the right direction. We're seeing very high consumer engagement and high video starts. An incredible 93% of our entire 55,000 episode library has been watched, indicating a very healthy long tail of content that has immense value to consumers now that we've made it available. We're also seeing high retention, over the first 60 days, as well as strong monetization that is already translating into incremental value. Guna will provide some additional details in financial context, but in short, stronger operating performance across the board is contributing to a better than expected financial profile and accelerating next gen revenue growth in Q1 and thereafter. very healthy role to pay, and initial signs of lower churn than we initially modeled will drive accelerating sequential domestic affiliate fee growth, even over Q4's impressive 5% growth rate as we begin to layer Discovery Plus on top of our core base, resulting in at least high single, if not double-digit, affiliate growth in the following quarter. We now have over 100 advertisers and brands on the platform in the US, and we expect to double that by the end of Q2. Our team is working hard at implementing our feature-rich product roadmap. We are now offering contextual keyword targeting, and interactive ads will roll out by the end of Q1 with pause and binge ads scheduled for Q2. And as the subscriber base further scales, The benefits of combining the intelligence and data mining capabilities on our end, together with advertiser first-party data, will represent a significant opportunity for us and our advertising partners. We are already an industry leader when it comes to time spent with our linear portfolio. Yet watch time on Discovery Plus in the U.S. is nearly twice that. This naturally has been extremely well received by our advertising and brand partners, which coupled with initial signs that Discovery Plus extends effective reach to non-pay TV viewers, gives us even more conviction and confidence in the long-term ARPU trajectory. In fact, our ad light ARPU in the US is already above linear and we are just getting started. As we scale and usage continues, we are confident our ARPU will grow meaningfully. Internationally, JB and our product and engineering teams are hard at work transitioning our former D-Play and Eurosport player platforms to our new Discovery Plus global product in time for the Tokyo Olympics and the Beijing Games not long thereafter. Discovery Plus will be the streaming home of the games in Europe with access to every minute, every medal, and every hero. live and on demand. Having this product integration completed will enable us to then execute more of our ambitious international expansion plan in the back half of the year, as I previously noted. Taken together, Discovery Plus has successfully launched as a truly differentiated product with a fantastic consumer experience, best-in-class product reviews, and terrific word of mouth. which is ultimately the most effective form of marketing. We are being educated every day on what's working and what's not, and are responding rapidly to iterate and experiment. We are utilizing all of our levers to effectively and efficiently acquire and retain subscribers, including a growing list of global partnerships with many of the world's leading distributors. an exciting pipeline of originals that we believe will surprise and delight consumers, and a brand campaign that is unrivaled in our history. The team is doing a lot right, and we have seen the payoff in subscriber additions and engagement, for which we believe there is no better use of our capital and resources than to continue to support these efforts as a means to drive shareholder value. With the very healthy metrics we've seen thus far, scaling our Discovery Plus subscriber base as quickly as possible is the best use of our free cash flow as we eye sustainable long-term financial growth for the overall Discovery company. Our first and foremost priority has always been and will always be to reinvest in our business to drive organic growth. Our powerful launch serves as a strong confirmation of what we have been hard at work building over the last many years, and that which the acquisition of scripts helped to accelerate. We have spent years amassing and cultivating the most popular real-life entertainment content, brands, and personalities, all with a focus on nurturing and delighting our fans across multiple video ecosystems, pay, free, and streaming. It's having a real impact, and an impact we expect will continue to grow. Investing in high-quality premium programs across the entirety of our platforms has always been our North Star. In fact, at a time when many of our peers are taking their foot off the gas, we expect to increase our spend on fresh content to support our linear networks this year. This further reinforces our strong value proposition to our distribution partners. Indeed, we believe the basic pay TV bundle is integral and relevant and offers an incredible value proposition to an important and large segment of consumers. Discovery is a true global IP company in every sense of the word. One of the very few true global IP companies. And growing our vault of great stories and series has laid the groundwork for the critical next steps we are taking. evolving from a pay TV and free-to-air company into a scaling global streaming player. Discovery's mission is to play hard in traditional free-to-air and cable with fantastic margins and free cash flow and play harder in direct-to-consumer while we are uniquely positioned to achieve long-term sustainable growth. With that, let me now turn it over to Gunnar.