Discovery, Inc.

Q3 2021 Earnings Conference Call

11/3/2021

spk_0: ladies and gentlemen thank you for standing by and welcome to the discovery incorporated third quarter two thousand twenty one earnings conference call at this time all lines or email listen only moon after the conclusion of the speakers 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 andrews leave in executive vice president global in better strategy so you may begin
spk_1: good morning everyone and welcome to discoveries que three earnings call with me today is david as love our president and chief executive officer to intervene those are see cfl and jb barrette president and ceo of discovery streaming and international before we start 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 at nineteen ninety five the forward looking statements of the comments regarding the company's future business plans prospect and financial performance as well as david concerning expected timing completion and effects of the previously announced transaction between the company and eighty mg relating to the warning media business these statements are made based on management current knowledge and assumptions about future events and about risks and uncertainties that could cause actual results to differ materially from our expectations in providing projections and other for looking statements the company disclaimed getting in touch your obligation to update them for different formation on important factors that could affect your expectations please see our horns and cape the year ended december thirty first two thousand twenty and as has been filings made with the us cures exchange commission and with that electron the call over to dead
spk_2: good morning everyone and thank you all for joining us this continues to be an exciting and busy time here a discovery across a range of business initiatives and strategic planning to the next year and the years ahead
spk_1: i'm very pleased with our focus performance and strong operating discipline
spk_2: as we simultaneously ramp up or integration planning strategic reviews and approach ahead of the one or media merger
spk_1: we are increasingly enthused about the transformative opportunity ahead
spk_2: by bringing together these complimentary assets talented creative leaders and employees all around the globe
spk_1: this morning i'll provide some brief commentary on que three operating performance and update you on the progress we're making as we work toward the close of our transaction and integration of the businesses google will then take you through additional put some takes on the corner very briefly on two three
spk_2: it was a solid quarter all around subscriber growth fraud directly to some a platforms picked up nicely how summer and we added a healthy three million paying subscribers around the globe reaching a total of twenty million subscribers and we've seen continued growth thus far in queue for we were able to deliver this growth as well as driving double digit growth in both advertising and distribution revenues while converting a healthy amount of orbit that to free cash flow this positions us nicely above our guidance of at least fifty percent conversion this year
spk_1: and we see free cash flow is tracking to exceed
spk_2: two point one billion for the full year and that after funding very significant investments in our discovery plus rollout
spk_3: additionally
spk_2: and importantly we have had the opportunity to refine some of our transaction leverage assumptions after examining one or media's draft carve about financials though we took a conservative approach initially while modeling the pro forma transaction
spk_1: we now expect on net leverage at close to be at or below four point five times versus the five times that we noted in may and we are currently tracking below the four point five
spk_2: this is predominantly based on estimated contractual adjustments to working capital and to a lesser extent and improved outlook in are operating performance
spk_1: accordingly we now see a path to reducing leverage to around three times meaningfully sooner than what we articulated in may
spk_2: more on this shortly from gunner but this points to a stronger financial footing then we had anticipated as we stand up the merged company and accelerate the pace to deliver supporting our ability to make focused investments and growth initiatives
spk_4: even without any asset sales
spk_2: on the regulatory front echoing john stank his comments on the eighteen call we are well on track for a mid two thousand and twenty two close and are engaged in the typical regulatory filing process and jurisdictions around the globe the including our plan filing with the se si of a preliminary draft of up merger proxy expected out in late november
spk_1: the transformative upside from the merger is of course the global direct to consumer opportunity and while we appreciate some of the questions than a number of you have asked regarding clarity and specifically regarding the product investment and go to market road map
spk_2: it is still premature for us to provide details given where we are in the ongoing regulatory review process
spk_4: that said
spk_1: having conducted further operation or to teach villages i can share with you some broad strokes around what underpins our confidence and enthusiasm
spk_2: and our global go to market attack plan
spk_5: first
spk_6: it's all about the content
spk_2: from the start on the one roof will be a combination of two companies whose common culture of creative axons iconic characters and franchises will result in a differentiated competitive offering
spk_1: i believe the biggest and most compelling menu of ip for consumers in the world
spk_2: spanning comedy to true crime kids and family lifestyle to adventure drama to documentaries news and sports and of course psi phi and superheroes i believe the most complete and bounds portfolio offered in one service in the world
spk_1: and secondly we view our ability and commitment to tap the glee invest in our content portfolio as a critical strategic driver building upon our respective long tenured track record of producing relevant and complimentary programming around the globe
spk_2: this should help them make our service uniquely global and local at the same time
spk_1: third given the breadth of our content offering we expect the combined service will appeal broadly to all demographics young and old with strong male and female genres again very complimentary such that our global total adjustable market should be the on par with the biggest streaming service assessing the overlap and respective subscriber bases at least here in the us we believe less than half of discovery plus subscribers are also h b o mac subscribers which with the right packaging provides a real opportunity to broaden the base of our combined offering and with our global appeal infrastructure a local market capabilities are international road map is very much still untapped and provide meaningful upside over the coming years
spk_2: lastly our ability to drive revenue and arpu positions us well for long term growth particularly given our plans to market with a lower priced at light service starting off in the us and later in t international markets a meaningful distinction from some competitors will we see an opportunity to drive value we gain confidence in this particular direction from our experience with aired modernization on discovery plus in the us where advertisers covet the incremental reach demos target ability and product flexibility and pay premium rate to address this audience helping make this tier or highest our pool or for it the opportunity to scale and a light offering represents one of the most significant upside drivers for the company long term
spk_1: while offering a compelling value somewhat price sensitive consumers and will benefit from discoveries depth in local ad sales infrastructure
spk_2: and teams around the world del monetize it's quite clear that the winners and streaming are and will be those companies that can provide consumers with the best quality stories the most appealing content choices personalized and simple products and all at a great value we expect are highly complimentary combination will drive such a winning value proposition i will be reflected across key operating metrics overtime a few words on the a linear side of the house before turning over to governor
spk_1: as we think about what can be achieved in terms of bringing great networks and brands together under one roof
spk_2: the analog the scripts is a valuable benchmark and we believe the opportunity is far greater here both on costs and advertising revenue potential ultimately to better support our core linear business and more broadly the entire traditional ecosystem
spk_1: this i believe is one of the least appreciated elements of this transaction consider with scripts the platform we created in aggregating female demos the bedrock on which we launched premier
spk_2: our product that offers advertisers the on duplicated reach of a broadcast network across all of our prime time originals at significantly more efficient cpm them broadcast
spk_1: we can take that advertising platform to the next level by weaving in sports scripted news and male oriented programming together with our existing core competencies it's a true when when generating significant revenue upside to us with improved options efficiency and savings to our advertising partner as by replicating the reach of a broadcast network at better value
spk_2: course synergy opportunities are significant we draw upon the expertise of our transformation office would censor merger with scripts networks and two thousand and eighteen continuously challenges are management team and me to refine and transform how we conduct and manager organization from top to bottom around the globe nothing is sacred and no stone is untarred
spk_1: could scripts we ultimately captured more than one billion in cost savings representing about thirty five percent of all non content expenses and about three times are regional synergy target before we stopped attributing incremental savings to the merger a large chunk of the cost synergy opportunity that we have already conveyed speaks to the best practices and tailwind in place for me integration of scripts it's a great starting point as we refine and integrate global ops and the price check corporate functions real estate direct to consumer infrastructure and check and streamline efforts across the public it is functions like sgn a and marketing spend
spk_2: a process that we see broken down into three distinct waves over the next few years
spk_1: we approached three billion in course saves as a tangible and achievable goal especially against the combined company that should spend around thirty five billion this year
spk_7: and growling from there
spk_1: stepping back for a moment to reflect on our direct to consumer pivot
spk_2: nearing a year since discovery plus launched i'm proud of what we've accomplished under the leadership of j be in the world class team we have assembled over the last few years we continue to learn a great deal challenge ourselves sharpening our focus and gaining perspective for the next leg of our direct to consumer journey with one or media and h b o and as we've noted recently we continue to refine our discovery plus plans taking a more thoughtful and tactical approach to investing in the product and doing so in ways that also support our plans for the combined company at the we close the transaction for example we are moving forward and priority markets such as canada italy brazil and the uk some of which were h b o max hasn't announced plans or in some cases has indicated that they can that launched in the near to medium term for contractual reasons as your heard from john jason and the team on their earnings call h b o max continues to aggressively move forward with their global expansion plans most recently and lactam and last week in europe and we look forward to close in the transaction so that we can coordinate and maximize our marketing technology and contents banned for the enhancement of the combined efforts until such time would continue to roll out new and exciting content to entertain a sustain our subscribers around the globe and our metrics look great roll to pay remains near seventy five percent global churn particularly in the us to continue to look strong and approaching peer group blows while app store ratings are firmly at the top while modernisation and engagement continued to exceed our expectations
spk_1: all of which helps to solidify our discovery plus base as we endeavor to roll into and formulate a more comprehensive and broader offering with h b o max
spk_8: in closing
spk_2: this is an exciting and dynamic time for us as we plan on next steps and we are as eager to share them as we know you are to hear them and we expect that will be in short order while the opportunity of course capture and enhanced efficiency is both tangible and material
spk_4: our north star
spk_2: our right to play will be in achieving long term sustainable financial growth resulting from the combination of these two great content companies
spk_1: helping to nurture are important linear presence while driving global scale across our direct to consumer platform
spk_2: anchored by as rich and relevant a portfolio a creative franchises anywhere in the world i'd now like to turn it over the gunner
spk_1: afterwards j b gunner and i will be happy to answer any questions
spk_9: thank you david the morning everyone of thank you for joining us today reiterating david comments i'm pleased with what the discovery team has achieved in the discovery plus analysts they not even a year ago over that time we have added fifteen million paying direct to consumer subscribers globally finishing the third quarter with twenty million paying the disease subscribers this sort of our discovery plus johnny we have launched in over twenty five new market notably the us and the uk and most recently canada and the philippines with brazil to come over the next few weeks at the same time we have continued to drive growth markets like poland the nordic italy and india where we doubled down on our direct to consumer approached with a renewed and expanded content often and our next generation revenues finish the third quarter with four hundred and twenty five million dollars for the quarter or a one point seven billion annual eyes romney with global be to see arpu of approximately five dollars and seven dollars blended discovery plus arco in the us again supported by our over ten dollar arpu for the discovery plot at like product which continued to monetize very well investment losses for the quarter word the low two hundred million dollar range slightly better than our guidance from last quarter and we expect investment losses more or less in that range of the fourth quarter as well
spk_1: as always we maintain a disciplined approach with respect to investing a direct to consumer initiative is both david and i have noted over the last few months it is through this lens that we view the opportunity ahead
spk_10: both leading up to the murder and beyond
spk_1: we are very focused on nursing our existing subscriber base with an increasing content offering a new product features
spk_9: at the same time you should expect us to be guided by a rigorous analysis of customer lifetime value at the fiber acquisition costs to determine our marketing spend for new of the defense a now i'd like to quickly review our reporting segments starting with the us third quarter advertising revenues increased five percent year over year pricing was healthy first last year driven by get pricing that was up forty percent year over year additionally we continue to see strong demand for discovery plus at night product which contributed to the growth in the quarter this was partly offset by with the audience delivery job a year from look at attributable to the nielsen panel issues as well as the lapping up are very strong performance last year during the pandemic furthermore some of our networks have lost share to the strong sports calendar this year was get a pricing is still very healthy and to for up thirty to thirty five percent of a both up front of last year the overall tone in the market as a bit more subdued the last few quarters his plans work through the constraints in the global supply chain and though there is slightly less visibility as a result we're very pleased with how our portfolios position based on the strength from the front and contribution from direct to consumer the service revenues increased twenty one percent year over year largely due to the continue growth of discovery plus as well as linear failure rate increases in part helped by successful renewals with director
spk_1: the horizon hooley and lt so far this year as this goes in our earnings release pay tv subscribers to our fully distributed linear networks declined by three percent year over year
spk_9: while total portfolio linear subscribers declined four percent excluding the impact of the sale or a great american country network last quarter turn into international which i will as always discuss on a constantine see basin international advertising increased twenty six percent was last year as the global advertising market place continue to recover from the pandemic also benefited from the olympics in europe across our linear and digital platform although as we've noted in the past advertising for the olympic games is less consequential in europe as compared to the us all of our international regions including many of our key markets like the uk germany sweden norway spain australia new zealand mexico where up meaningfully compared to last year as well as compared to twenty ninety we momentum continuing to queue for even as needless to say the year the year coms get tougher from you're on out
spk_1: international distribution revenues grew six percent during the quarter primarily due to the growth a direct to consumer subscribers which have nearly tripled over the past year across our footprint outside the u s in part aided by olympic silence turning to operating expenses total company ah packs increased fifty percent during the quarter or seventeen percent excluding the olympics or which the overall a over the losses were in line with our guidance of around two hundred million dollars for the quarter we continue to focus on driving efficiency in our core linear networks and we remain on track to reduce core linear a new the low to mid single digit percentage range for the year turning to somehow keeping items net income for the quarter was one hundred and fifty six million dollars or twenty four cents per share on a daily basis the couple of items to note first we recognize a twelve cents per share noncash day from the fifteen billion of notional interest rate hedges that we recently implemented to mitigate interest rate risk for
spk_9: future debt insurances to find out the cash portion of the one a media transaction
spk_1: the hedges provide additional security and visibility towards our overall cost of the a related debt financing which is now trending better than our initial expectations
spk_9: and the final note on those at the derivatives do not qualify as hedges for accounting purposes we are required to report the changes and fair market value on our income statement which could result in some additional variability to or a net income until the one or media transaction close we will of course called his impact out each quarter second the impact of people a amortization during the third quarter was thirty cents per share adjusted for the about u p s would have been forty two cents per diluted share
spk_1: or effective tax rate during the quarter was fifty percent on we continue to expect a full year effective book tax way to be in the mid teens range for cash taxes we continue to anticipate a raid in the high twenty percent range for the year excluding pp a amortization though this is subject to change as we are carefully monitoring ongoing tax legislation and we expect of extra have roughly a negative fifteen million you have a year impact on revenues and a negative ten million dollar impact on a o that are in the fourth quarter now turning to free cash on our leverage we generated seven hundred and five million dollars or free cash flow and the quarter obviously a very strong conversion rate of a of it up
spk_9: notwithstanding the continuing investments were making as well as a return to normalize content production level year to date or a over there to free cash flow conversion rate is over sixty percent and with a few months left in the quarter we see free cash or topic two point one billion dollars for the for year and clearly ahead of our fifty present cumbersome guidance
spk_1: and to expand on point david made earlier we now expect or net leverage to be at or below four and a half times by the time we closed the one a media merger over the past few months having have the opportunity to dig further into one amigos draft cargo financial and with better visibility on estimated working capital in conjunction with are better pm and that precursor performance we now believe that we will have a healthy amount lesson lesnar that that clothing than originally anticipated while naturally these metrics or police emery and contra working capital or close we now do expect to be the position to reduce leverage to three times meaningfully sooner than what we stated in may or long term target that leverage range for warner brothers discovery remains that to and after three times as we work towards causing the one media transaction mid twenty twenty two we have redirected our experience integration and transformation of to hit the ground running
spk_11: and as we refine our strategic review and integration plans and as we develop our synergy capture plans for other we are as enthusiastic it's ever about the prospects of combining these two world class portfolios and franchises with that we look forward to sharing a lot more do time and for now at like to turn the call over to the operator to start taking requests
spk_0: thank you sir
spk_12: and we will now begin to question and answer session as a reminder if you wish to ask a question simply press bar than the number one on your cell phone keypad once again that a star warming is on the phone keypad your first question is from the line of the beatles and from credit suisse your lines the whooping
spk_13: bug mr dudley chosen your you're kind of here with the ifa he owned a response when is addressed as mr sky at an outsider you a lot of your utterly the that can epic the me been look at they i appreciate the up into the murder and and and the lower that leveraged you talk about the content vision for the job
spk_14: combined company and and that of all the i guess it's got with report question david the first is is war brothers and us enough now in content under eighteen t while they're sort of focused on on on on the merger
spk_13: it you know how are you thinking about how much content span should be to women in global streaming versus how much the companies are
spk_2: yeah i was spending today and and the of his ability on on what warner's making that that can be coming out in late twenty two and twenty three twenty four sons will be in particular you know the two three three or cycle and he thought about be helpful thank you and thanks dad
spk_1: first this is something that johnston key in i talked about us
spk_2: we create this vision together of this company being what we believe is the best media company with the with the greatest and most comprehensive content offering and as part of that we're spending more money on content and leaning in and one or media be spending more money on content and leading in we both committed to do that to keep both of our ecosystems nourished and strong and growing so when the deal the what when and if the deal gets approved and we come together will come together with strength and you see that with
spk_15: on the warner side where we were cheering them on with the success of dune
spk_2: the around the world
spk_1: it with an in there and and toby on that side and casey boys having an incredible run at h b o with succession white lotus hacks mer of east town
spk_2: the at the it's just a as you look at the culture and the impact of of that content together with the extraordinary library they have us leaning in on our side with more original content and so you know for us the were also spending a lot more on the international side to get ready we think that's a strategic advantage and when you look at the content yeah do we think you know in terms of the demographics that with that we will appeal broadly to every demo i mention this but wish very strong with with with women that's a particular strength of discovery will where we were during many quarters with the leading media company in america for women together would lead the view of women watching our channels whether it's food or age t or oprah or id
spk_16: it and tlc and that continuing
spk_2: in addition if we look around the world it's not just local content but weird leader in sports in europe they have sports in latin america and cnn is the leader and news with the most compelling news brand around the world and one of the few global may be the only global news service that has the kind of resources around the world in news gathering and so as we go out and build this service and make this offering and i do think it's the best content wins is a great product in in in netflix in entertainment is a guy great product with with disney with with jay back is building i'm with entertainment
spk_17: and we think we have a comparable product maybe even more diverse lee attractive in entertainment
spk_2: but on top of that we also have sports which were using in in europe and learning a lot from and a markets like poland what we're doing news and sports together would broad entertainment and nonfiction we're finding you know real meaningful traction and real reduction in churn and so i think we have a lot to learn
spk_1: but we have a terrific product and dad were working on our go to market we have brought on a a bit of an old friend of mine who i've known for for fifteen years where are the most talented people like think in in the business he's breeze busy with lot of other things but we we do have
spk_2: a commitment now that kevin mayor who built by disney plus will be in the car with as a consultant with j be and i and bruce and gruner in the whole team as we've already built as with talked about a go to market strategy we can be honing that kevin has a big brain he's learned a lot about this we've learned a lot in europe and with discovery plus we've been added for a long time but he he had a lot of success at disney he's super excited about getting in the car with us and helping with everything that he's learned a lot of knowledge about
spk_4: about window weighing about about how different people of content whether it's movies the form we're anxious to get no room
spk_2: with an in and and the and the team at warner i was there last week meeting for the first time with and whole team but they're super smart over there and so we think adding kevin to the overall team is going to be helpful to us and
spk_9: off we go i they you know who's got the best menu i think we got the best menu
spk_18: and is just one point i would add obviously easily we scrutinize of each other's investment plans that part of the the deal discussions and as as we said before the all the financial guy is that we'd given around the deal is always assuming it's a pretty significant step up and and content investments or were over the coming coming years
spk_0: great break it off
spk_19: your next question is from the line of john who do leak from you s your lines know open
spk_20: okay guys thanks
spk_2: couple quick questions on an advertising odyssey a lot of for of trend going to the fourth quarter you got the step up from the from the up front but but potentially some some slow down from supply chain issues or david anyway that you guys could sir characterize what which is he going forward on that side and maybe break out what you're saying terms of the linear been as versus the dc
spk_1: tax
spk_2: sure well i would just start with this is the most successful up front that i've seen in my career
spk_21: i think from an industry perspective it is up twenty and it was very very materially bit bigger up front for us because of premier and because of the length of view and the the certain advertisers wanting to be aligned with the brands that we have and the characters that we have and so i think it's a big big help or to us that we had a
spk_2: very strong up from there are supply chain issues
spk_1: there are pot level issues
spk_2: but we're still seeing that there will be material growth and advertising and if we can predict what's gonna happen in the future but as i've said before
spk_1: i saw a lot of people in the mid nineties saying that it's the end the broadcast television it may be a transition away from a lot of the younger demo being on there but we see huge numbers and were where you know we're not getting credit for it but i think one of the reasons why the ad market was up so much for us
spk_2: is the advertisers know there's a massive audience over fifty five watch enjoyed watching h g watching discovery watching id and they get those the
spk_1: right now they get him for free we talked about in the upfront number of us in the industry independently were out there trying to get credit for that but i think that them with linear platform is is here for quite a long time and they'll be ups and downs on advertising but advertisers they find it very effective to be in in in linear v audio much more effective than others and then we have the complimented discovery plus which is just you know a huge driver for us in terms of the demo compliments and attractiveness of gunner
spk_22: i don't really have a lot to add to that did i mean will be feeling very very good about our position of the up front door the the continue contributions from from d to see a but i did want to point out a little as that ability and for approval for the me to tell but the mobile will be growing ah
spk_0: very elderly of the fourth water i believe on today's perspective
spk_23: great because your next question is from the line of discoveries are earlier from bank of america your line is no open anti tank that to question i'm on the integration and appreciate all the comics you did make what what is the most challenging area and one area of opportunity and you've you've actually gone through it at discovery i'm already in in waves but you know new technology stack and you text that can you talk about you you knew you'd transitioned offer them
spk_2: oh my god does that the major league baseball fan fact sorry for you to of of man tax created your own so as you look at combining but with h b o max like one of the challenges and one of the ultimate benefits and costs savings and then second question david you sudden you're prepared remarks on that you can make acquisitions without as itself just wondering what pieces you think you're missing and the combined company let let me start by saying look i don't think we're missing anything in the first thing we're going to do is look to drive all the for mendis assets and the differentiated ip and great library and local content that we have pull it all together and and go to market with it we have something quite strong
spk_4: i'm i'm i'm just making the point that are there will be given that we're going to be delivering quicker given the fact that where we will be much lower level than than expected that over time
spk_2: as others are struggling that they'll be an opportunity for us to look at ip and and to see where we need where we need more help if we need more help on the integration side we're really lucky we got to big tent poles year will
spk_1: what is going to will be the cfl of this company the did he's done exceptional job he led the initiative with with scripts were we said we'd be less than three and a half times levered two years later on we did it in less than a year and we said we deliver three hundred and fifty million and we delivered over a billion
spk_2: and all that was just course not revenue synergy he came up with these targets isn't that is quite confident in those targets and so i'm gonna will be kind of the lead horse he'll he'll talk to it you know we've been very experienced team here the bruce campbell and j b and adrian i've been together for twenty five years we're looking forward to bringing in some incredibly talented people at warner but when we acquired universal j b was the one for
spk_9: poop for bob right and for jeff ml that ran the integration of that entire transaction
spk_1: while you know which was cable movies theme parks with over one hundred and forty six you know work teams and work groups
spk_9: and and did it and and did a magnificent job on that and so we were were fully deployed we got we you know there's a lot of that we can't do now but to know what an i pass it off to you and jb gotta i'll have done that jb comment on the on on on the on the tech a part of the of your question jessica but but again mean from the perspective of of challenges again as as i as far as up and saying from from the very beginning we've taken a conservative approach to this were very well aware of the of the size of the checked girl that were riding here for for this a combination and we have been ah
spk_1: you know with our assumption self the all the work that we've done since gives me more confidence and and our ability to deliver while
spk_9: that is as i as as david tennant as i said earlier the them and in the in the prepared remarks you know doing more work now having you know transparent be into albeit your draft car about financials the for for the one a media a cop out group said the would be to the cash payment is going to be a significantly lower one from today's perspective your that gives us a better starting point from a from a leverage perspective and and the as we said earlier you know this is sort of below four and a half times the average that we're seeing right now is to a large extent driven by working capital just was a some extent it's also driven by
spk_1: by our current performance both for the biennale and dude and the free cash flow are being you know about what we what we assumed in our conservative agency model that we do we base our first communication or so again it's a it's it's it's early still we are busy zone can only do so much until we have regulatory a clearance but as we said that seem as of running is i'm robinson are or to transformation officer and his team fully redirected at this now so that wouldn't
spk_24: is the ground running and i and and i think we're in now are very good shape
spk_1: you are putting out of you want to be he questions you would attack platforms a job you want your why don't you give a perspective on our on our looking at that that just gets out of the a big opportunity for us we look at it as a one where we're undergoing right now essentially an audit of both platforms and i don't think necessarily the decision to the monolithic one in a wheel
spk_25: look at these as multiple different modules that make up all the different components about their an hour tech platform
spk_24: and and we have a lot of experience as you mention in terms of the effort and the work as a discipline required and we platforming
spk_1: i'm at either one to the other or you know in one direction or the other that decision we haven't made yet we're undergoing obviously a a significant diligence process to underscore which is the best
spk_24: in class
spk_26: on both and it may be a little bit of a combination of or of those depending on certain modules in the platform that we may apply and so we think it's actually a great opportunity because rich and jason and the team on their side of obviously spend a lot of time and are investing a lot in in upgrading their had plot
spk_1: from as we speak we've obviously spent a lot of time and a lot of money doing the same over the course the last twelve eighteen months and as the two groups come together we will have essentially a choice of a what we think will be an incredibly attractive kind of pet buffet that we will look to be the best of lot of both
spk_23: the decide how we move up into a common platform are going forward
spk_24: added a few maybe not one
spk_1: yeah i just want to clarify one thing jessica because if i if i understand your your question greater you were referring to to acquisitions that's nothing that we that we said in are prepared remarks and remarks and just to clarify were not anticipating are planning for any acquisitions at this point no david pathetically i have the opportunity and but but to say they are the power
spk_24: our on the and and you don't have the to the take a long have you got you got your this as you said already in of the fans have a happened you to talk a little bit of the have any color on what the cost savings will be from combining and what the best seller from having one platform
spk_12: well that they'll be there will be meaningful cost savings from coming not buying into one platform i think they also will be meaningful a consumer benefits from combining and one platform and i think the other thing to keep in mind is yes
spk_24: a part of what in davis comments about us being more discipline and tactical at this stage of of facing the what for the rollout discovery plus for example is also a view towards we may be able to more quickly and markets where we may not have launched discovery plus to be able to quickly fall
spk_27: more quickly fall the content offering into a joint platform
spk_1: at that stage vs haven't you read platform to existing platforms in a market into one and so i think speed the market will be a variant of both
spk_24: i'm in a where we haven't haven't launched number one and number two
spk_1: while we at the final decisions on exactly which are to the tech platform we we migrate to will influence how long it takes is to get there but remember that there may be two phases to this were there may be an initial phase which allows for more of a quick bundling of services and a second phase which eventually allows for out it's a common service on one tech platform that sir that's the timeline and evolution certainly just that were talking more detail as soon as we can give you more color
spk_28: but let it maybe if i can add one thing a jessica again what we what we said when we first doesn't feel that was remember there's roughly six billion dollars and technology and marketing spend between the two one or assuming growth we we brought together to companies with significant expansion plans i'm a lot of that spend his by by by it's nature of for
spk_0: cause relatively independent of the subscriber number already there is a streaming related costs of are but a lot of it is is fixed and so there's a huge opportunity to to to completely to duplicate that span base and debbie's point of multiple waves is very on the marketing side i have no
spk_29: were no doubt that we will out of the game sort of even in the first phase the for fully aligning attack upon will be able to get a lot of leverage out of the the combined the marketing spent of thank you so much
spk_2: your next question is from the line of alexia god running from dp one london your life that woman but i just a couple questions i can and how do you think about growing sort of local content and find the success your batted in a with that strategy and then secondly i'm really on the new side it is it better to have started standalone new streaming service in your opinion or combine it with entertainment to me
spk_1: ah thanks alexia a hill one of the real advantages of discovery is for twenty years we've been
spk_2: in market with local teams selling locally producing local content throughout latin america throughout europe i'm in europe we expanded into free to air in a number markets where where the equivalent of n b c or c was cbs have some markets where the equivalent of like nbc and cbs combined you know in northern europe and poland what quite big with number food air channels in italy and germany and we have a we have a library that's meaningful in each of those markets and the we have it'll a a lot of data on what people are watching we have a good sense of what kind of content they're looking at on the directives
spk_30: from the platforms because we've been added for a long time we also have sports in europe
spk_2: and we've we've we've we've tried a lot of things some haven't worked out as well as we as as well as we'd expect than that's a good thing because we've learned that sometimes packaging the sport independently doesn't work as well as packaging it more broadly but number sports together reduces the churn significantly makes the appeal higher or when you put sports together when that the detainment together with nonfiction it we came out with the olympics you know we had a million plus sign ups for the olympics and so we continue to learn that's a good thing i you know we're continuing continuing to invest learn and grow that's what john and and jason and an and team is continuing to do want a parallel basis independently but as we come together we'll all be smarter you look at at what people thought about windowing of just as a student of this and the meetings i'm having what's the right windowing strategy what works best for a direct to consumer product is it better to the have to build up by a movie in the theater and then bring it is it stronger on the platform as it goes day and date is it stronger if it goes day and eight at thirty dollars versus free there's a lot that we are learning just as observers and there's a tremendous amount that jason has learned in am and that disney has learned and that the industry as learn and one of the great benefits for me is i have this ability to really listen and all so this been a great experiment in how people consume and content and you know when people come on for a movie elite that the was series hat what's what's the reaction a lot of what is on the waterside i haven't seen because you know at this point we can't see it but the general industry knowledge and trends are things that were noting aggressively and were learning from and you know we're continuing to experiment in europe on the new side he you we've been we've been experimenting ourselves and in poland we we went independent now we're we're packaging it together i think it's gonna it's it's it it it is probably going to depend on the market it depends on the offering we have a very very strong service and poland and it's been very helpful to us little we're we're we're we're what i'm leading voices in the market we have a twenty four hour news channel they are that's quite compelling we don't know what the right answer yet but having news and sports no news is sub the more people go to with a direct to consumer products the lower the churn the more time they spend the lower the churn once why we're so excited about how much time people spending with discovery plus you know which as a librarian that's being broadly viewed and you know it any idea that people spending hours on that
spk_31: product and the churn is low is encouraging for what bodes for the the combination of the to but as people if you could put news or sports and people also go regularly for that it's another reason to have the service it's another reason devalue the service it's another reason not to churn out of the service and yeah
spk_0: if disney has been very effective in doing packages of services we don't put them together
spk_1: bundling and so and either that's that's the current plan right now for cnn as we read about it and so the it's it's exciting and will look and city thank you very much
spk_32: your next question is from the line of but the morale from rbc capital markets your last open
spk_1: good morning a picture taken questions and one of the ask about btc investments for standalone slavery and then throw in a bit on the the leverage and comments suffers given a deal it clearly make sense to take a more disciplined approach to your btc strategy i see in this will drives them near term financial benefits so keep provided
spk_9: bit more color on the dp feel batsman levels going ahead i don't you call that the low two hundred million range for cute rent you for yet where are you seeing some opportunities here and is that a good quarterly run right through deal closed or can the losses continue to me narrow given the strong topline friends any second accelerated pop to be leveraging post feel close is very encouraging your anymore colleagues and provide on the drivers for both discovery standalone where do you continue to deliver robust free cash flow and then on the pro forma outlook
spk_1: which is good or it's fantastic to hear about your continued role here and i know you provided a lot of shows are ready but any more specifics on the improve performance leverage targets particularly if there's an updated view on proof for my even thought given maybe some minor asset sales from the warner media site thanks ah rate ah thank you could come let me let me start with the with it with the delivering a piece here and and give a little more color again the that there are two things that we have updated one is sort of our model of how we how we look at pro forma combined your financials by the company and number two is just
spk_33: flowing through our current performance and that's by the way i a link to your first question as well as were just doing a lot better with generating a lot more free cash them what we anticipated half a year ago but if you take a step back near the the that the challenge here is that one a media is not as done own company but is it is a is a car about group we obviously
spk_1: certain assumptions about what be balance sheet of that the company and parvati would look like but had to wait for some some is still draft card or financial to get full confidence in in a in the financial set up of that that combined entity and and accordingly you know what we put into our model and what i presented to rating a
spk_9: she's for the up for vote for the rating discussion was a a conservative model not fully flowing through certain adjustment the most important at one of which is the working capital adjustment i'm so we have all we talked about the forty three billion dollars as subject to adjustments and that's the working capital adjustment from today's perspective
spk_1: looks like it's it's going to be nope ill for five billion dollars lower in terms of you know what the what the net payment is going to be with an impact on the net net debt balance that we're going to start this company with and then that has obviously a very significant impact on leverage the the second thing though is about twenty five or thirty percent of a lot of this improvement here it just driven by our if you're better operating performance i was you better a have it up improves the ya denominator of of that leverage equation and ah and and that's developed very nicely as well and i do want to copy of this new as we said right now looks a lot one half times this number is gonna move around with with working capital of what's not gonna change
spk_9: change in my view is that the very significantly increased confidence that i have in our ability to very very quickly be lever below the three times and to the very quickly get us into the that the long term comfortable a leverage target means and again and the other point one of the keep pointing out his behalf of
spk_1: he had a log questions on his we have already made it very significant i'm very significant reinvestment start in in our business case i'm to your first question
spk_26: the on the d to see and better than all of the a j be talk about some of the opportunities a little more because we we do have thought of as the of the olympics coming up and and in a market monsters and kicking in here but but but you're right in general we've always looked at that will continue to look at capital allocation to the lens of the lens of risk and bhutan the returns
spk_1: i'd is is is is almost fairly easy in this in this space because it's just the relationship between customer lifetime value on subscriber acquisition costs and it is fair to say that i've been asked the marketing teams to give us a little more caution between the two in order to you know that matter some of the and uncertainties as we go into the scenarios for up the for next year ourselves ah you're right we should see the lower investment losses especially if you keep in mind that the beginning of next year we're starting to calm against the the very significant investments that we made in the first quarter of bar of twenty twenty as we launched the yard the the us
spk_24: the us product at the same time out to want to point out we're we're we're continuing and of david is that we're continuing to to flee nurse the existing subscriber base that we have were continue to invest in in in content in a significant way so keep that in mind as well over the next the a few quarters with you will continue to see content expense coming up are also continued and invested technology and him and then product features which as a little less focus i would say in the mix on on necessarily driving for the free every last dollar every last subscriber i'm debbie
spk_12: yeah the only thing i'd add donors obviously as we approach the the of her mouth surprisingly many of the partners that we work with internationally that have been a great part of our success
spk_24: and that you've heard of talk about bomb are also asking the fair questions about how much money and how much effort they should put behind
spk_1: you know marching in new markets as we going to point to point to have given questions about the future brand of the future a product offering et cetera so we're getting the same questions from partners which is totally legitimate and and sort of that is making has been out in some cases rethink when is the right time to launch and a lot of that is largely when they're those things are being pushed off is a yeah a putting off and marketing
spk_0: and in some cases content expense
spk_32: to or to later or when we have a better view of what the the combined product will look like and we can come back to our partners with a more definitive sense of when and and what we will be launching together
spk_1: that's great thank you both your next question is from the line of reached greenfield from lights had partners your lifestyle open for taking the question ah a few months ago one of the left the i love our platform having the joins with the with
spk_34: but it was looking into the field scout of is why only direct relationship versus or the whole dalglish without a lot by the that were to put discovery by on stars were the three remarks players like on child
spk_35: i gotta get to reveal your perspective a picture how do you think about the couldn't take the the alibi whether don't believe and
spk_2: the discovery future or whether you think company like one he had been state not working with our out to be cured i think about that image is likely including couldn't founder on earth are you planning on being what it is pure math and his colleagues or with that for the the going on we're making or that wait happening apollo thanks which we have a go to market strategy that we feel that we have that built
spk_1: i think the haven't kevin mayor in the air
spk_12: in the passenger seat which a be and and bruce and i and eventually with the warner team with all of his knowledge and expertise haven't built
spk_24: and driven disney plus globally i think you know and a little
spk_12: move will help to finalize and fully inform our strategy but we're we're given we on the regulatory process would just not
spk_24: ready at this point to share all that with you guys we will we expect to and we will soon or big yeah i mean rich or on the on the channel store question the reality they've always been a very good partner of hours on discovery side were well aware that as you said it's been taken a different position i think with the three questions that we'd have that we are we're waiting indeed further with the h b o sided number one we we have found so far that he'd their the the question about these channels to and bringing in a different customer base than what would i be able to address directly a is an ongoing question and we certainly seen some good incremental subscriber growth coming from that channel store ecosystem and how much of that it's cannibalistic versus what we could do direct or not is an ongoing said of analysis that we have going and obvious you want to compare notes or with t out with the h b o team at the right time but that's a question because ultimately we want to try and get our product out to as many consumers on whatever platform arms as or the second is the data element and the customer relationship which i think is a little less known and i think as some of the amazon executives have talked about public now we we we do have access to customer information as part of our ah our relationship from and that's an important differentiator that doesn't make is just the sort of traditional anonymised panels for relationship where we actually have customer information on the channel store consumer and so that makes the equation a little bit different and so you overlay those two thing and and we say you know the third thing is obviously we want to have more gate conversations with got the water team and look and see whether a on the strategy that they're following today or the strategy that we're falling today makes sense with the combine and the the north star will be two things which is openly out we get the product in in far more consumers in aggregate
spk_36: and how do we do it in the financially strong way and if we think we can deliver a a a you'll get the customer relationship
spk_37: like get in front of more people with the with the right economics i think it's one that we will certainly
spk_1: remain very open to so we haven't made a decision definitively but we are will remaining very open a move for me that will be part of the story when we come back few rich in the team will tell you more about it ah and had the right time very helpful thank you
spk_9: your next question is from the line of stephen call from those by go to lengths to open thanks aren't many gonna come to their color on the lower levels in the occasion for the merger and you also mentioned that dragons and pretty encouraging conversations raising the deaths i'm just wondering the up at gonna come in a little cheaper and i think you gave him that he stayed guidance for around three times for their ca
spk_1: buying company initially and getting there and about two years should we assume that you get there a little more quickly just because you're going to be starting from a lower base or that more that will just have a bit more flexibility starting from that point at times of allow on and then you know any one for for jd on discovery plots and action is it logical to with you may be
spk_38: just a little bit slower pace of not as going forward as he take a more focused approach and sort of avoid stepping into places where h b o is strong and and be a bit more selective i'm in it that is the case i'm wondering if there's some free cash will benefit their that near term strategy just kazakhstan's run the a little bit lower thank you
spk_9: right
spk_33: the get a dull ah yeah i mean i'll start with the with the flexibility at yemen as i said the and in my prepared remarks you i am a very convinced from today's perspective that we're going to hit that upper end of our target range of three times earlier than we originally originally mention
spk_9: and it is the two and a half to three times range that i that i that i want to see a going forward and the to your question about your flexibility we don't need flexibility because ordeal model already assumes very significant reinvestment and further investment in in building out your the dnc product and and growing pundit expenses or
spk_1: verb the over the that the five your tom your that we have that we have model yes old clear answer is yes very very hopeful that we will be deal
spk_10: dig that upper end of the to the to after three times range earlier i'm regarding regarding raising death again we've mentioned the the fifteen billion dollar hedge that we have put on and you know pretty much in line with what i said earlier about the conservatism and our initial model
spk_24: the answer's yes there is some there's some room we have obviously you know taken some conservatism as well as we modeled our our our interest rates we've been we've locked him in a very attractive mates with this surf fifty billion dollar had program
spk_1: again you know don't want to make any promises will feel a bit and so we will be some time before we implement the the financing and but a good part is had now i will have to monitor them you know the spreads as well but i i believe that we're in a very very comfortable position relative to what we put the a crowded and the and the
spk_20: original statement in an art and art your models and and of the boy headed off to a j b for the for the for the subscriber outlawed here you know get the the financial part of that question is yes absolutely
spk_39: assume no further free tesco a performance your as we as we move forward and i do want to have the balance sheet and and the been the best possible shape as we come up on on closing the deal and as as as i said earlier i know it was guided to at least two point one billion dollars free cash also it's fittingly i conversion them but we went into the year with him
spk_24: we guided him at the beginning of the year and that that's all part of our ambition year to be disciplined and and and and get the sabanci the now and in perfect shape
spk_40: maybe dust added consistent with laguna to said you read we should assume obviously we're putting your dogs to push
spk_24: see good growth in the markets were in and will be marching on us market and brazil here are of course next two weeks and so we're excited about that we still be healthy growth out of those markets and we're spending at levels to good as point that we think are reasonable without meaning to for him
spk_20: what the be the sort of slightly more
spk_0: conservative
spk_41: fact ltv ratio the we're spending at plus the slowdown in some of the new market launches as we go towards the end of the year in detroit zoo doesn't mean the the net as numbered will be a little bit slower than not than they might have no the path
spk_42: great thank you and i'm a maybe we're just rich i realize we didn't hit riches second question about the bundling clarification i think david in my point on the bundling with purely that in now back to jessica's question about the tech out it will take a bit of time no question the come to one platform and so while that process is under way they will be opportunities in a much quicker fashion closer to day one to potentially do some very creative bundling propositions that is a interim strategy not a long term strategy i think at this point is what would say
spk_43: this will be your last question from the line have been swinburn from more than selling your last open
spk_2: thanks good morning as release noted renewals with directv and brides and during the at the quarter i'm just wondering if you guys could give us a little bit color on it i sort of their that the key takes their and and whether you see healthy affiliate see gross coming out of ad or any changes in packaging and if the merger impacted how you approach those deals given data you may that point that you know bring turn the turner networks in is a real the under appreciated asset car and part of this transactions of that sir that's my first one and and i wanted to come back david guetta rather see a lot of focus on the merger and and including your management team at you're put together congratulations on the on bringing kevin on board is that i don't know how much you can say but is is there hope that that convert to a consultancy to an employee ship and i'm just curious if you still gonna remain chairman of the zone which i think answer is a least in some regard a competitor to you guys in europe
spk_30: they fought
spk_2: thanks at fitness app the level of our neck is is a very old friend and he's out she is he worked with mean cabin and in providing the opportunity for us to get a a good amount of kevin's time but yeah he's fully committed to lan and his own and he's doing some other things as well yeah he's he's driven down all these paths and the is great entrepreneur and these got a number of really exciting things she's doing and working on this is one of them
spk_1: and i think is gonna be really helpful to j and and i am bruce and
spk_2: and he's having a great time doing what he's doing buddy super excited about it kind of really come in and giving us the full scope of his experience and brain on on everything he's he's seen and learned and in a working with land has been a good thing i think he's seen and learn more about europe and sports and mom so i think that's exciting the the the team at warner and the way they're growing the the knowledge the capability their the attack plan that they have is really impressive you know and fossil it's super strong it it this thought he you look at the that that the stride the that product you look at the strength of our product so i think we got a lot of really good people you've seen through the his for our history with scripts that were really about who the best people said we're gonna have be able to build a really strong team and bring in some outside experience as well
spk_1: but it's it's it's really encouraging how well they're doing and what we're learning along the way and that that's a big help or do or
spk_2: to us on the affiliate side and and gonna you can fill in some more
spk_9: but at the we we reach deals that were very favorable for us i'm on the carriage side very strong
spk_1: and i think it's when when there are they would they want to commit to carry all of our channels and this whole idea that a bunch of our charles we're going to get dropped that never happened they're good value and on say i don't say that with great glee but when you wouldn't be overall package and and the viewership you know where we're where a great value
spk_44: and they make a lot of money selling are are selling advertising on our services so it went very well for us with it with meaningful increases and and we'll security and i think it went well for them and continuing to get really good products
spk_45: and the in terms of how do we know her at what your dad is a salon with warner has nothing to do with it you know where were operating as an independent company and were operating on the strength of the the channels sir that dad kathleen french and nancy and have admin building here with discovery and
spk_0: and o'brien and and food and h d and so it's a we've been over delivering people love our stuff and it's just reinforcing of this narrative that despite the fact that the world is changing that damn that
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