Discovery, Inc.

Until that time, your lines will again be placed on music holds. Thank you for your patience. ladies and gentlemen thank you for standing by and welcome to the discovery inc first quarter 2021 earnings conference call at this time all particular lines are in the listen only mode at the conclusion of the speaker's presentation there will be a question and answer session also please be advised that today's conference is being recorded i would now like to hand the conference over to mr andrew slavin executive vice president global investor strategy sir you may begin

Everyone, thank you for joining us for Discovery's Q1 earnings call. Joining me today are David Zaslav, President and Chief Executive Officer, Gunnar Wiedenfels, Chief Financial Officer, and J.B. Perret, President and CEO of Discovery Networks International. You should have received a copy of our earnings release, but if not, feel free to access it on our website at www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we'll open the call to take questions. Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31st, 2020, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Good morning, everyone, and thank you for joining us today to review both our Q1 performance and the meaningful progress we are making since our launch of Discovery+. Across our operating segments, brands, and global markets, I couldn't be prouder of how our company has executed, near flawlessly responding with creativity, precision, and focus across the board, while at the same time accelerating the pace of innovation throughout our organization as we embrace substantial growth opportunities around the globe. We continue to reposition the company and put it on a path of sustainable growth for the long term. Our ability to generate free cash flow is crucial, allowing us to fully fund our pivot and underscoring the efficiency of our model. Indeed, even during this moment of increased investment, as clearly evidenced in our financials this quarter, our free cash flow machine is working harder than ever, and it is reinforcing an evolving narrative about Discovery's differentiated hand. With the strong global launch of Discovery+, we are now scaling a very well-received global direct-to-consumer offering that complements our incumbent linear channel presence in every television market around the globe. In Q1, Discovery had the most-watched domestic pay TV portfolios Internationally, we enjoyed an impressive seventh consecutive quarter of linear share growth, anchored by our 27th straight month of growth in our female genres and best-ever quarterly performances in several markets, including the UK, France, and Germany. This growth was supported by the continued global expansion of our Scripps lifestyle brand and content. We achieved this while simultaneously launching and building Discovery+. Our continued strategic focus leverages Discovery's powerful competitive advantages, well-established consumer connections in every market in the world, vast local language IP ownership, deep and expanding distribution relationships, and a super-efficient content production model. to power both our global direct-to-consumer expansion and our core linear business. To achieve this, we are investing more than ever before in our content across the board to support these platforms. So far in 2021, it is all coalescent and exceeding all of our early benchmarks across almost every KPI. We are pleased to report that just four months into our U.S. launch of Discovery+, and with the vast majority of our international expansion still ahead of us, we have 15 million total paying subs across our global direct-to-consumer base. And we continue to move forward with strong momentum. When I think about our 15 million direct-to-consumer paying subscribers that we have today, And the fact that we were able to add 10 million paying subscribers since the end of last year, I'm just really impressed with our traction. At the end of Q1, we crossed 13 million paying global next year subscribers, representing sub-growth that compares quite favorably to our peers over the same period, underscoring the value, appeal, and stickiness of our content. all of which supported our conviction about our opportunity ahead. But our sub count tells only part of the story. We are equally encouraged by early metrics and KPIs across engagement, churn, and monetization, and ARPU, particularly in the US, which likely place us at the very top of an impressive list of peer offerings. many of whom have had a far longer runway thus far than we have role to pay has been between 80 and 85 percent of free trial subs engagement is approximately three hours per day per viewing subscriber and well ahead of linear retention is strong giving us confidence that while early monthly churn is trending toward low single digits. Consumers clearly love the Discovery Plus product. We see that on social, in the App Store product ratings, and the feedback from partners, clients, and talent in the marketplace. Our App Store ratings rank as among the sector's top. Our Apple App Store rating is 4.9, and based on a very large number of reviews. Our strong early KPIs are driving exceptional monetization. Our $4.99 ad-light product, with only four minutes of commercial time, generated over $10 of ARPU in the quarter, already well ahead of our longer-term goal, and it's still trending up. Our overall blended U.S. ARPU of around $7 is already in line with what we generate in Linear. And we see healthy momentum for that figure to grow during the course this year. And on a global blended basis, we are seeing ARPU of over $5. UNO provides some additional detail on metrics and KPIs. But in short, we are working towards a substantive customer lifetime value, particularly as contrasted against the cost to gain a subscriber. encouraging us to lean in from an investment standpoint when it comes to marketing, content, and technological capability in order to maximize this meaningful growth opportunity. We have an extremely focused approach on all the ways we can be available to the broader swath of users while driving a rich and dynamic user experience. A cornerstone of this will be expanding our partnerships with many of the world's leading distributors and platforms. We recently launched on Comcast Xfinity Flex and soon on X1 and are deepening our relationship with Amazon around the globe with availability on prime video channels in the United States and a global rollout plan for other PVC markets. Now let's look at Italy. It's a great example of a market where we see encouraging early signs of the long-term growth potential against which we are executing our strategies. bringing together our market expertise, strong local talent, sticky original content, management resources and relationships, production and technology infrastructure, and popular brand and channel presence. Like a number of other markets in Europe, Italy is relatively underpenetrated with respect to pay TV, at roughly 20% with really one main distributor. It has significant mobile penetration and usage, and where Discovery enjoys a healthy pay and free-to-air presence with depth and local in-language content. And though we have grown our audience share, the existing Pay TV market structure limits the upside from this segment of the ecosystem. The launch of Discovery Plus has catalyzed a new growth trajectory. Our addressable market has grown more than 10 times from Pay TV to now include mobile and broadband. Discovery Plus enables an entry cost for premium video that's 75% plus more affordable than traditional bundles. And Discovery Plus ARPU are already more than three times greater than our wholesale portfolio. This is a powerful combination of potential universe and price growth. What we are seeing in Italy guides our thinking on the prospects of what our other international markets could look like. There are significant markets such as Brazil, Germany, and Australia with similar characteristics, and where our ability to offer a direct-to-consumer offering packaged with mobile or multi-platform operators should ultimately result in new customers, higher ARPUs, and a deeper direct connection with ARPUs. Of equal importance is the balance we have been able to strike across our linear and direct-to-consumer businesses. Reflecting on our Q1 performance, which by many measures is still facing COVID-related headwinds, I'm proud of our team's ability to manage through difficult operating circumstances, and you will see that in our Q2 outlook. Guna will take you through the details, but I'm pleased to note that every international region is seeing positive advertising growth for 2020, with record shares in Q1 from major markets like UK, France, and Germany. We are seeing the great resilience in our advertising business, not just internationally, but also domestically. This, taken together with very strong scatter pricing in the US and public spending across the globe, give us confidence in our advertising outlook for the balance of the year, especially with the growing Discovery Plus opportunity. We couldn't be more excited to present to our advertisers at this year's Upfront on May 18th, at a time when our brand and programming have never been stronger or more relevant. At the same time, growth in both domestic and international distribution revenues will be boosted by Discovery+. Net-net, we see a healthy inflection in our revenue trajectory behind a global backdrop of improving underlying advertiser demand and continued share gains, particularly in our international markets. Taking a step back and assessing where we are as a company, I'm extraordinarily optimistic. We've gotten off to a great start with Discovery+, exceeding our expectations and are effectively managing through as dynamic, fluid, and exciting a time as I have ever seen in my many years in the media business. We are encouraged by the engagement and reception to Discovery+, from our consumers, advertisers, and distribution partners around the globe. Underscoring the strength of our differentiated hand. This is an early tailwind that gives us great confidence as we lean even harder into our pivot. Yet, as important as Discovery Plus' success is to the future prospects of the company, of equivalent importance is our core linear business. The foundation of the company and backbone of our strong free cash flow. As we drive and... long-term sustainable growth. It is imperative that we nurture both sides of the company as interconnected and supportive to one another. Thank you, and I'd like to turn the call over to Gunnar, after which J.B., Gunnar, and I will take your questions. Thanks so much. J.B.