Discovery, Inc.

Ladies and gentlemen, welcome to the Warner Brothers Discovery third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Additionally, please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mr. Andrew Slayman, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Good morning and welcome to Warner Brothers Discovery's Q3 earnings call. With me today is David Zasloff, President and CEO, Gunnar Wiedenfels, our CFO, and J.B. Perret, 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 that 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 US 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'm pleased to turn the call over to David.

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 after strike soon. We made a last and final offer, which met 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 Brothers 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 four times net levered. While paying down debt and de-levering 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 touchpoints. More on this soon. One of the big advantages we have at Warner Brothers 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 J.B. 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 14th, 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 and produced and co-starring Robert Downey Jr. The franchise, a half-hour comedy about superhero moviemaking created by Armando Iannucci and Sam Mendes. The Penguin, a limited series based on the DC Comics character set in the Matt Reeves Batverse and starring Colin Farrell. And we're also looking forward to new seasons of award-winning series such as House of the Dragon, and curb your enthusiasm, just to name a few. 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 will 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 US. and everywhere across the globe. Our new chairman and CEO of CNN Worldwide, Mark Thompson, is in the seat now. He's 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 primetime 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 postseason 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 is 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 market 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 Macs and HBO Macs 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 has been a very successful and steady segment for Warner Brothers 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 pure play 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 a billion-dollar 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, multi platform 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 over longer cycles and at higher levels where for 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 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 brothers 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 thank you david good morning everyone and thank you for joining us this morning