Warner Bros. Discovery, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Warner Brothers Discovery second quarter 2022 earnings conference call. At this time, all lines 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 like to hand the conference over to Mr. Andrew Slabin. Executive Vice President, Global Investor Strategy. Sir, you may now begin.

Good afternoon and welcome to Warner Brothers Discovery's Q2 earnings call. With me today is David Zaslav, President and CEO, Gunnar Wiedenfels, our CFO, and JB 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 and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31st, 2021. Our quarterly report on Form 10-Q for the quarter ended March 31st, 2022, filed with the U.S. Securities and Exchange Commission on April 26th, 2022. and our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which is expected to be filed with the SEC on or about August 4, 2022, as well as our subsequent filings made with the SEC. A copy of our Q2 earnings release is available on our website at ir.wbd.com. We released a trending schedule with pro forma results and additional financial information, which also can be found on our website. And lastly, our discussion today will include an accompanying slide presentation, which following the call will be available on our website. And with that, let me turn the call over to David.

Hello, everyone, and thank you for joining us. We've had a very busy and productive four months since launching Warner Brothers Discovery, and today we want to provide you with an update on where we are and where we're headed. Among our top priorities have been combining the rich legacies of these two great organizations, building out our senior management team, and beginning to integrate the cultures into one global operating company. We've made significant progress on all fronts. Nearly our entire senior leadership team is in place. And I could not be more excited to continue locking arms with the exceptionally talented group of individuals that we've assembled from both legacy companies. Plus more recent additions like esteemed filmmakers Mike DeLuca and Pam Abdi, now at the helm of Warner Brothers Pictures Group, and a uniquely talented media operator, Luis Silberwasser, driving our leading global sports strategy. And just last week, we announced our new Chief of Diversity, Equity, and Inclusion, Asif Sadiq. Asaph previously served as head of diversity, equity, and inclusion international for WarnerMedia and is one of the most dynamic leaders in the diversity space. Since the close of the deal, the entire leadership team has been moving as quickly as possible to integrate key elements of our business, assess growth opportunities, and make important progress in our synergy capture and strategic planning. We've been able to dig deeper into the financials and have gained a much better, more complete picture of where we are and the path forward, including identifying some additional and unexpected challenges that have and will continue to require our focus and attention. The upside is that there is even more room for improvement and cost savings. At the same time, we're keeping a close eye on the many cross currents and headwinds at play in the macro economic environment, both here in the US and globally, including inflation, the threat of recession, and the complexities of today's geopolitical environment. In light of all these factors, we've had to make some additional adjustments, which we'll talk about. Gunnar will walk you through our financials and the path forward in a few moments. Suffice to say, we are more confident than ever in the strength of our position and believe we are on the right path to meet our strategic goals and really excel, both creatively and financially. Our long-term investment thesis is truly compelling, and we have great conviction in the opportunity ahead. Warner Brothers Discovery has the most powerful creative engine and bouquet of owned content in the world. as highlighted by our recent 193 Emmy nominations, more than any other media company. The fact is, there are only a handful of companies globally that can do what we do. And putting it all together, we believe no one does it better than us. Spanning HBO, Warner Brothers Film and Television Studios, CNN, our world-class sports business, and category-defining lifestyle and nonfiction content engines. Our asset mix, one of the most complete and diversified in the industry, uniquely positions us to drive a balanced approach to creating long-term value for shareholders. It represents the full entertainment ecosystem and an ability to serve consumers across the entire spectrum of offerings, from premium pay to linear and free-to-air, theatrical to streaming. This was the driving force to create this company over a year ago, Our objective was not only to be one of the top global streaming companies, but also a media company able to drive financial returns by distributing our content on every platform. And our conviction has not changed. While we're still in the very early stages and helped by the first wave of our Synergy initiatives, we will have repaid $6 billion in debt by the end of August. And we have implemented initiatives leading to $1 billion in run rate synergy over the next 12 months with at least an additional $2 billion in the works as part of our cost synergy plan. We did very well at the upfront and believe we have meaningfully outperformed our peers. As I said at our presentation, we see ourselves as essentially the fifth broadcast network due to our unparalleled portfolio. and our low to mid-teen CPM increases are nearly 6 billion in commitments, clearly demonstrates that advertisers now view us exactly that way. We offer our partners the most complete portfolio of live sports and news, lifestyle and entertainment, and our average share of viewership outside of the football season exceeds 25%. On some nights, we're bigger than NBC, ABC, CBS, and Fox combined. Well, there's a lot of uncertainty in the economic backdrop. This is a strong proof point for the value we bring to the table and our ability to improve monetization over time. In many ways, we're just getting started and have really only begun to scratch the surface with respect to the potential upside and believe we'll make even more headway in the next two to three years. At every stage of this endeavor, as we pursue opportunities and tackle challenges, build and grow our business, we will be guided by three strategic priorities that will inform all of our planning and decision making. First, we will seek to attract the best storytellers and use our unparalleled creative engine, franchises, and brands to produce the most compelling and diverse content offering in the world. We are home to many of the most iconic brands and franchises in the history of entertainment. Batman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones, CNN, HBO, HGTV, Discovery, Warner Brothers Pictures, Warner Brothers Television, and many, many more. The opportunity this presents is truly unmatched. We're also the preeminent maker and seller of content in the world. And going forward, we will continue to invest smartly in content. in ways that will help us to grow, achieve greater market share, and have a bigger impact. Some of the content we create will be distributed on our platforms, like the highly anticipated House of the Dragon, premiering on HBO Max later this month. And some will air on other platforms, such as Ted Lasso and Abbott Elementary. Our focus is on making great content, content that people want to watch and will pay for. As I've said, it's not about how much, it's about how good. Owning the content that really resonates with people is much more important than just having lots of content. In other words, at a time when almost every piece of content ever made is available to consumers across any number of free and paid services, curation, quality, and brands have never been more important. And that is what we do best. When the measure is who's got the best stuff, no one has a better hand than we do. Second, we will maximize the reach, engagement and overall value of our content to a broad distribution and monetization strategy. Our job is to tell great stories and to bring them to as wide ranging an audience as possible in as many ways as possible. and to deliver the greatest viewing experience possible. Certainly, technology plays a big role in this, and we still have a lot to learn, but it's equally important that we be flexible and agile, able to respond to ever-changing consumer preferences. As the maker and owner of the largest and most complete library of content in the world, we cover more surface area than almost any other media company, theatrical, streaming, Linear, cable, free-to-air, gaming, consumer products and experiences, our own platforms, others' platforms. And we have no intention of being beholden to any one in particular or to a specific business model. Simply put, we are open for business. There's been a lot of experimentation in our industry, and we are all smarter for it. At Warner Brothers Discovery, we believe strongly in the importance of preserving optionality and driving returns through a strategic mix of distribution and windowing options. For example, we will fully embrace theatrical, as we believe it creates interest and demand, provides a great marketing tailwind, and generates word of mouth buzz as films transition to streaming and beyond. When you're in theaters, the value of the content and the overall viewing experience is elevated. Then when the same content moves to PVOD and then streaming, it is elevated again. As films move from one window to the next, their overall value is elevated, elevated, elevated. We saw this clearly demonstrated with The Batman and Elvis. We have a different view on the wisdom of releasing direct-to-streaming films, and we have taken some aggressive steps to course-correct the previous strategy. With respect to streaming, our main priority right now is launching an integrated SVOD service. And in a few moments, JB will talk more about the strategy and some of the key building blocks and milestones as we bring HBO Max and Discovery Plus together under one offering. Our streaming strategy has evolved over the past year and really reflects the importance of, rather than the dependence on, this segment of our global content monetization plans. I am pleased with the work to date and the progress we continue to make on this front. And in the spirit of optimization, once our SVOD service is firmly established in the market, we see real potential and are exploring the opportunity for a fast or free ad-supported streaming offering that would give consumers who do not want to pay a subscription fee access to great library content, while at the same time serving as an entry point to our premium service. We will talk to you more about our potential plans at our Investor Day, which is planned for the end of the year. I'm also pleased to announce today that we have extended our relationship with AT&T making them a trusted partner in the distribution of HBO Max as part of their service offerings. This is great news for our business as it ensures that even more people will have access to our world-class and award-winning content. This leads to our third strategic priority, and that is to operate as one company with one mission, to be the premier media and entertainment leader globally. We believe the best way to maximize the value of our company is by operating our businesses as a combined enterprise rather than as a series of separate, siloed, and unconnected business units. HBO, Warner Brothers Pictures, Warner Brothers Television, CNN, our U.S. networks, sports, we are stronger together and we're making meaningful progress in operating our businesses as one team. We also have a great ability to promote, advertise and introduce new products and services enterprise wide. And we intend to take full advantage of these capabilities. You saw this with the successful rollout of Elvis across all of our platforms, and you're seeing it now ahead of the launch of House of the Dragon. We're employing every capability at our disposal. It is the biggest campaign in HBO's history, and it's already paying dividends. Rewatching of the original Game of Thrones is up dramatically on HBO Max. We're also going to be opportunistic about the way we grow our business in the future, whether by improving existing products or services to enhance and personalize the consumer experience, introducing new ones, or expanding into new markets globally with particular focus on how to scale smartly with an eye on sustainable free cash flow. even during periods of incremental reinvestment. We see ample opportunity to drive significant efficiencies from further integration and transformation, which Gurner will take you through. It's a foundational tenant of how we will operate and manage, the byproduct of which will be significant free cash flow generation and growth. So, our three strategic priorities are to create the most compelling and diverse content offering in the world, maximize its reach, engagement, and value through a broad distribution and monetization strategy, and operate as one company with one mission, to be the premier media and entertainment leader globally. In an industry as dynamic as ours, we are best positioned for success. We have everything we need to thrive, creatively and financially, including the greatest and most popular franchises and IP, the most diverse collection of global media brands and assets, the ability to generate awareness and excitement for our products across our own various platforms, a strong leadership team, and the most talented creatives. While we're still in the early innings, I couldn't be more excited about where we're headed as a company. As I said, we're open for business. And if you're in this business, this is the place to be. We look forward to sharing lots more with you at our investor day at the end of the year. And with that, I'll turn it over to JB, and he'll walk you through the details of our SVOD strategy.

Thank you, David. And hello, everyone. Over the last almost 120 days, I've had a chance to spend time with this incredibly talented team, take a closer look at both products and their technology, better understand our proficiencies, as well as areas where there's a need for further development, and dig in on what consumers are saying about the two services. We have a lot of work to do, but these first few months have only strengthened our belief in the significant opportunity ahead of us, and I'm excited to share with you some initial thoughts on our strategy and roadmap. First, a bit of context. For decades, our industry has embraced changing technology and consumer demand by evolving the very successful windowing approach to exploiting content. However, in recent years, a strategy has emerged that suggests the video business will be better off collapsing all windows into streaming, overpaying for and overinvesting in content, and offering it all at the same time for a low price. We don't believe in this strategy. While we intend for streaming to be a critical part of our company and a key driver of our growth as consumers continue to shift their viewing habits from linear to nonlinear, it's only one part of our diversified approach. The focus of our streaming strategy is consumer choice. We believe there are multiple global consumer segments in streaming, just like there have been for decades in traditional television. Some who are willing to pay a premium for an ad-free experience, others who are more price conscious and prefer to pay less with limited advertising, and a sizable third group who will not pay a subscription fee and only want to enjoy ad-supported entertainment. Warner Brothers Discovery's unmatched depth and breadth of content provides us the opportunity to offer something for everyone. Providing consumers with a range of entertainment options will maximize our reach, and financial returns. Currently, we're focused on launching our combined SVOD product with both an ad-light and an ad-free version in many markets. But as you heard, we've also begun to explore options of how best to reach consumers in the free ad-supported streaming space. We currently license our library to others, but we'll assess how best to play in this growing business as the model evolves from free-to-air linear to free-to-view streaming. Now, focusing on our ad-free and ad-light SVOD offering. The great news is the combination of HBO Max and Discovery Plus could not come at a better time, as both are enjoying strong momentum. HBO Max has emerged as the most acclaimed streaming service among consumers, and Discovery Plus remains one of the top-rated apps and the dominant leader in real-life entertainment. They are also two very unique and complementary streaming services. distinct in their content appeal, ranging from premium scripted series like Succession and the much anticipated House of the Dragon to leading unscripted programming such as 90 Day Fiancé and Fixer Upper. The two services are also different in terms of how subscribers engage with the content, some of it being more appointment viewing, driving subscriber acquisition, other content being more comfort viewing, driving subscriber retention. with people watching hours on end. These are two critical and powerful components of a strong and sustainable subscription business. Couple this with our world-class collection of globally recognized brands, franchises, series, and characters. It is truly an unprecedented combination. In an already crowded market, consumers know these brands and they trust them to deliver quality. The quality of our content engine speaks for itself as evidenced by the 193 Emmy nominations this year, more than any other media company.

From drama to comedy, documentaries to factual, lifestyle to reality, local series from around the world to sports in Europe and Latin America,

and of course, movies. Ahead of the launch of our new combined service, we're introducing a number of exciting interim initiatives. First, content sharing. As we announced earlier today, Discovery Plus will add a CNN Originals hub on August 19th, making it the home of the award-winning CNN series and films, including the Anthony Bourdain collection and featuring series such as This is Life with Lisa Ling, and Stanley Tucci searching for Italy. And starting later this fall, HBO Max will begin hosting some of the Magnolia content from the incomparable Joanna and Chip Gaines, including their latest series, Fixer Upper, The Castle, arriving in October. Second, as David mentioned, we are leveraging the marketing power of our combined portfolio. With the biggest TV audience many nights in the U.S., the second largest broadcast group in Europe, the number one pay TV portfolio in LATAM and leading pay TV lineup in APAC. We will drive significant awareness for our content and streaming products much at no cost given the creative use of unsold or non-commercial inventory. Stark Week is just one recent example of the marketing benefits and financial synergies we see from strategic cross promotion across our company. Now, More about the product and technology. We will roll out our new combined offering under a single brand, and we'll have more to share closer to launch. On the product side, we recognize that both of our existing products have shortcomings. HBO Max has a competitive feature set, but has had performance and customer issues. Discovery Plus has best-in-class performance and consumer ratings, but more limited features. Our combined service will focus on delivering the best of both. market-leading features with world-class performance. To deliver this, our team has developed a clear roadmap to migrate onto one tech stack, leveraging much of the core infrastructure of the highly rated Discovery Plus service with significant and important feature enhancements from the more established HBO Max. Our product design and feature set will enable better content discovery and more personalized choices. All this, coupled with the unparalleled breadth of quality content, will help drive our leading objective, which is growing engagement. This will, in turn, enable us to meaningfully reduce churn, support gross ads, and increase monetization, particularly with our ad light offering. There's much work to be done over the coming months. From retooling the tech platform to enabling proper content and metadata ingest around the world, and ensuring a seamless customer migration for launch. There's lots to do. And we're determined to get it right, which will take a bit of time. Our primary focus for the rollout will be in the markets where HBO Max has already launched, given its broader international footprint. We plan to launch the service sequentially starting in the US next summer. Latin America will follow later in the year european markets with hbo max will follow in early 24 with additional launches in key asia pacific territories and some new european markets coming later in 2024. of course as we get more of the development work and testing under our belt we will explore ways to accelerate the rollout if and where it makes sense in addition There will still be significant opportunity for expansion beyond this as these 70 plus countries represent less than 60% of broadband homes globally, excluding Russia and China. And many of the biggest markets such as the UK, Germany, and Italy do not fall within this 2025 plan. But we want to remain disciplined and prove out the strength of our product and profitability first. All this culminates in developing a strong, financially attractive business over the next three years. Our focus is on shaping a real business with significant global ambition, but not one that solely chases subscribers at any cost or blindly seeks to win the content spending wars. Instead, one that scales smartly. So now, what does this all mean for the streaming business? Our financial north star will be EBITDA. driven by solid top line growth and greater cost efficiency from the combination of these two products. We expect peak EBITDA losses for the DDC segment will occur this year in 2022 as we do the heavy lifting around technology, personnel, and integration ahead of the planned relaunch starting next summer. We're targeting the US streaming business to be profitable in 2024 and for the global streaming segment to generate a billion dollars in EBITDA by 2025. Embedded within this target result for 2025 is an EBITDA drag from less mature markets and new market launches. We believe that we can achieve these milestones with a total subscriber base of around 130 million global subs. Today, our total subscriber number for HBO Max and Discovery Plus is 92 million. an increase of 1.7 million over first quarter. This number now excludes other streaming products in the portfolio and synchronizes our subscriber definitions, which Gunnar will get into more later. The goal of this is to provide you with a clear and transparent number of true paying subscribers to our core service. You should also note that we estimate an additional overlap of around 4 million subscribers between the two services today. So we anticipate adding more than 40 million incremental subs by 2025. Turning to ARPU. As we just reported, our current ARPU is almost $8 globally, comprised of nearly $11 domestically and almost $4 internationally. We expect healthy ARPU growth off this base due to a few factors. First, A new pricing strategy, consistent with our profitability focus, we will shift away from heavily discounted promotions that were part of the gross ads focus strategy of the past to a more balanced approach that optimizes revenue as well as subscribers. Second, and related to this, price increases, particularly in certain international regions where we are well below market, we will also plan for periodic increases as accepted in the marketplace. Third, scale benefits from broader distribution of our ad-light offering. And as our reach and engagement grow, we will also drive CPMs leveraging technology-enhanced products and targeted advertising. We've clearly started seeing the benefits of this at Discovery+. On the cost side, we see meaningful synergies from two particular non-content areas. Marketing, which is over 60% of SG&A, we'll see benefits by moving to a single branded product, leveraging the power of our own networks, as well as more optimized spend. In technology, which is the third largest portion of our OPEX, where we will eliminate duplicative spend, reduce third party vendors, and see significant opportunities for automation. Looking ahead, we will continue to have healthy content investment, though with these two content portfolios coming together, we see smart opportunities to do this at a much more measured pace than in the previous plans. All in, we see long-term margin potential at scale of at least 20% and expect to make significant progress towards that goal over the next few years. Lastly, based on the operating leverage in the business, we believe we can achieve incremental margins of around 50% of every dollar of additional revenue growth. To summarize, At Warner Brothers Discovery, we believe that in an already crowded market and at a time when the global economy is prompting many consumers to prioritize their purchase decisions, we are uniquely and best positioned to be at the top of global consumers' lists for video entertainment. Our greatest strength and what positions us for success as a company long term is our ability to monetize our unparalleled collection of content in multiple ways in order to provide consumers choice and optimize asset value. That is what we intend to do, and streaming will be one key part of our overall strategy. We look forward to sharing more with you as we get closer to launch, and now I'll turn it over to Gunnar for a closer look at our Q2 financial. Thank you, JB, and good afternoon, everyone.

As you heard from JB, we are taking a thoughtful approach in how we intend to scale our D2C business, smartly and methodically. and as just one component of a more balanced distribution strategy versus one that seeks to drive subscriber growth at any cost. This will be an important theme throughout the discussion of our second quarter financials and our outlook for the balance of the year, as well as 2023. Turning to our financials, as you can see, it's been an extremely busy first full quarter as a combined company, strategically, operationally, and financially. Picking up from when we spoke to you last, while we've already implemented a significant number of initiatives following the closing of the WarnerMedia transaction, we've only become more confident about the long-term potential for Warner Brothers Discovery. The strategic logic behind bringing these two great companies together is as apparent and sound as when we announced the deal. As noted prior, the recently concluded upfront is a timely example of just that. Despite the more challenging macro environment, we're very pleased with our performance, which proved the enormous value of our content portfolio to our advertising clients and as a differentiated means to service brands. Out of the gate as a combined company, we have been focused on debt pay down, and I am pleased to report that by the end of this month, we will have paid down $6 billion of debt since closing the transaction. We're equally as focused on integration and efficiency, and I'm very pleased with the progress of the Synergy program. We now have 1,000 individual initiatives staffed, measures already implemented worth $1 billion of run rate savings, a clear grip on milestones and business cases for at least another $2 billion in flight, and eyes on further upside and opportunities. We will continue to update the market on progress as well as implications for related costs to achieve as we move our synergy program through the implementation stages. Now I'd like to very briefly address our Q2 results, which we are providing in a new segment structure. The composition of our new segments is very similar to the way Time Warner presented previously. In addition to the second quarter financials, we also provided trending schedules, including 2021 segmented pro forma financials with the earnings release this afternoon to give you a financial baseline for Warner Brothers Discovery. The trending schedules are also available in our investor relations websites. I will speak to the second quarter financials on a reported basis and will address growth rates on a pro forma combined XFX basis, as always, to provide more transparency on underlying performance. Let's turn to the individual segments, starting with studios. Studios results were driven by strong games performance, specifically behind LEGO Star Wars The Skywalker Saga, as well as consumer products, while home entertainment and theatrical faced difficult comparisons against last year's strong COVID-lifted catalog sales and larger film slate. Within networks, revenue was up 1% and EBITDA was down 11%. Advertising increased 2% globally, largely driven by sports on the turner nets in the US, while international advertising was down modestly, in large part due to the sale of Chilivision, last September, as well as a decline in EMEA. Global distribution revenue was down slightly, with the US flattish and international down 3%, which was impacted by pricing declines in Western Europe. EBITDA decreased in part due to increased sports rights costs versus last year. Within D2C, revenues increased by 4%, while adjusted EBITDA declined $325 million year over year. Performance was mainly driven by number one, substantial content investments across the global footprint as part of the push to launch HBO Max and as many markets as possible prior to closing the deal. As well as number two, revenue pressures in the wake of sunsetting the Amazon distribution deal last September. And number three, tough prior year comps with 2021 enjoying the benefit of the day and date windowing strategy for Warner Brothers feature films. Consistent with our prior comments, we continue to thoughtfully spend ahead of the launch of our integrated product, in part having put some planned new country launches on the back burner, but we are gearing up and are very excited for the global release of House of the Dragon in August, the highly anticipated prequel to Game of Thrones. Importantly, we're changing the way we present our D2C subscriber numbers going forward to align our subscriber definitions across the legacy discovery and WarnerMedia business. Starting with the paying subscriber count reported on our Q1 earnings call of roughly 100 million subscribers, we have made the following key adjustments that total 10 million subscribers. First, the HBO Max subscriber number historically included certain unactivated subscribers under the AT&T mobility distribution agreement. Consistent with legacy discovery policy, we will exclude such unactivated subscribers going forward. Second, as JB detailed, we have refined our strategy with a clear focus on one combined D2C product. As such, going forward, we will exclude non-core D2C subscribers outside of the Discovery Plus or HBO Max products from our account, such as subscribers of Motor Trend, Eurosport Player, and a few smaller other products. Against this harmonized definition, we ended Q2 with 92.1 million subscribers, representing 1.7 million sequential net ads during the quarter. These refer to the aforementioned trending schedules for historical subscriber data as per the harmonized definition. Please note that while we have adjusted our ARPU calculations for the corresponding revenues, total Warner Brothers Discovery D to C segment revenue will still include fees received from and for those subscribers no longer included in our core subscriber count. Now turning to the consolidated group. On a consolidated basis, revenue was down 1% driven by increased intercompany eliminations impacted by larger internal sales and licensing, while adjusted EBITDA was down 31% or $812 million year over year. These results are driven by the legacy WarnerMedia businesses with significant cost increases across all segments. Please note, year on year, FX was a $228 million headwind to revenues and a $30 million headwind to adjusted EBITDA during the quarter. Despite the many cross-currents running through our P&L at the moment, we ended the second quarter with $789 million of reported free cash flow. This included approximately $250 million of cash restructuring and one-time charges related to the merger and integration. With respect to overall Q2 financial performance, clearly these results are neither indicative of the health of the underlying assets nor of their longer-term trajectory. but rather the fact that we're starting from a less favorable position compared to our expectations. In addition to the clearly more challenging macroeconomic backdrop and a changing industry dynamic in the streaming space, we have also now had an opportunity to fully assess Legacy WarnerMedia's financials post-closing. Having concluded this process, we determined that certain Legacy WarnerMedia budget projections that were made available to us prior to closing varied from what we now view as Legacy WarnerMedia's budget baseline post-closing. On taking a deep dive and pressure testing what we found, our assessment has resulted in lower EBITDA projections. Specifically, we identified a number of approved investments and foregone revenue in various parts of the business that, when taken together, impacted full-year 2022 EBITDA by roughly $2 billion. Some examples of these business decisions include, number one, significant reductions in external content sales. As part of a corporate initiative to prioritize HBO Max growth globally, new content licensing deals to third parties were largely halted and content was, in general, made exclusive to HBO Max. This is, of course, an upside opportunity over time as we ramp initiatives back to a balanced level of monetization depending on relative value contributions. Number two, Similarly, certain actions taken to limit HBO Max's B2B distribution provided a headwind to performance, and we believe there may be opportunities to course correct. Number three, substantial investments in kids and animation content for both linear and D2C platforms without an adequate investment case against them. Number four, substantial investments in direct-to-HBO Max films for which, again, we did not find sufficient support. This means adjusting the way we invest going forward and also evaluating those projects already completed or in progress. Wander Twins, Bad Girl, and Scoob Holiday Haunt are examples of streaming films that do not fit this new strategic approach. These are difficult decisions, but we are committed to being disciplined about a framework that guides our content investment for maximum returns. Number five, significant incremental and loss-making content investments for the Turner Networks, specifically content spent on shows that did not have a path to generate sufficient ratings or incremental monetization potential. And number six, incremental corporate expenses transferred from AT&T resulting from the spinoff of WarnerMedia as per the final carve-out financials. While these factors will, of course, impact our 2022 financial performance and 2023 to a lesser extent, we have implemented immediate measures to address and redirect the trend line. most importantly supported by key leadership changes and the introduction of a more robust framework for capital allocation based on financial metrics and measured KPIs. Key measures include, number one, the shutdown of CNN+. Number two, restructuring the scripted content portfolio on the linear nets, kids and animation, direct to HBO Max films, as well as international local content not sufficiently supported by robust enough investment cases. Number three, A more balanced approach to external licensing as we embrace a more holistic content monetization model for Warner Brothers Discovery globally, generating significant revenue upside while protecting key strategic franchises such as Friends, Big Bang Theory, Game of Thrones, etc. Number four, implementing an HBO Max distribution strategy aimed at wide availability as opposed to D2C only distribution. As well as number five, greater accountability, alignment, and communication across businesses. Turning now to synergies, our work on integration and transformation since closing gives us increased confidence in the synergy opportunity. Every day over the past 15 weeks, I have experienced the muscle memory that many on our integration teams have built over the past years of change and integration. We have already implemented initiatives totaling more than $1 billion of run rate impact. This will grow from this point. The opportunity to implement transformational change across the global organization is enormous. and we're being thoughtful about its prioritization and cadence. Individual initiatives range from direct merger-related opportunities, such as consolidating our real estate footprint against hybrid and agile work environments, to opportunities tied to David's operating philosophy as one integrated company. The latter opens up tremendous transformation potential along systems integration, process harmonization, and importantly, optimized utilization of our O&O promotion and advertising potential. I am very pleased with how well the program has progressed so far, and based on the savings potential in our initiative funnel, I have full confidence that we will extract at least $3 billion of synergies overall, with $2 to $3 billion of synergy realization in 2023. Naturally, we'll update the market regularly as certainty on value and timing increases. With that, I want to share our current thinking on the 2022 and 2023 financial outlook. As you may recall, we first developed our guidance for the combined Warner Brothers discovery 15 months ago. Today, after 100 days of thorough analysis and financial planning post-close, we are adjusting our 2022 and 2023 EBITDA outlook, primarily based on, first, a less favorable macroeconomic backdrop, resulting in a more conservative outlook overall and for ad sales specifically. Second, a change in the streaming industry dynamics and our strategic response. And third, as noted earlier, the differences in legacy WarnerMedia budget projections that were made available to us prior to closing versus what we now view as legacy WarnerMedia's budget baseline post-closing. Taking all these factors into account, 2022 will clearly be a transition year, and we see an adjusted EBITDA in a range of $9 to $9.5 billion. For further context, I'd like to provide some color on third quarter trends. global advertising revenues in the third quarter will be impacted by some tough prior year comps, specifically the Summer Olympic Games, two NBA Eastern Conference Finals games played in early July last year, as well as the sale of Chilivision. And given the less favorable macro environment, we are seeing softer demands in the scatter market at the moment. As such, we expect Q3 global ad sales to decline by high single to low double digits based on current booking trends. On the positive side, we are beginning to see the impact of our course correcting measures, and we expect some synergy capture beginning in the back half of this year. Furthermore, we expect to generate free cash flow of around $3 billion after cash cost to achieve in 2022. On that basis, I am expecting net leverage at year end to be approximately 4.8 times. According to our outlook for 2023, based on the full year impact of our 2022 corrective actions and $2 to $3 billion of synergy realization in 2023, we expect adjusted EBITDA to be at least $12 billion. We expect to convert approximately a third to a half of our adjusted EBITDA into free cash flow in 2023, as we make progress towards our long-term target of approximately 60%. The cadence of content investments, restructuring spend, capex, and working capital improvements will impact the timing of free cash flow generation. With that, I want to give a quick snapshot on our balance sheet. We are reiterating our long-term gross leverage target of two and a half to three times, which we expect to hit by the end of 2024. And our gross leverage will be within our current ratings category by mid 2024 or earlier. As stated before, we will continue to dedicate virtually all free cash flow generated to debt reduction until then. We have $53 billion of total debt at the end of Q2, including $6.5 billion of term loan. Importantly, our debt financing is generally long-term, with an average maturity of more than 14 years and a 4.3% average interest rate, and equally importantly, interest rates for the vast majority of our debt are fixed. We have no remaining payments due in 2022, and we currently have $1.3 billion due in 2023 and $4.3 billion due in 2024. Also note, earlier this week, we finalized the post-closing working capital adjustment process with AT&T as part of the merger agreement. And as a result of that, AT&T will pay us $1.2 billion in August. With that, And combined with prepayments made in July, by the end of August, we will have paid down $6 billion since closing the transaction in April. We've covered a lot of ground today, but we've really only scratched the surface with respect to the significant amount of strategic work being done across the organization. And we'll take you through a much deeper dive with a comprehensive look across continent networks as well as D2C at our analyst day towards the end of the year. In closing, if there is one key message to take away, it is that we have never been more excited about the underlying strength of the creative bedrock of this combined company and the broad monetization opportunities for decades to come. David's leadership team has come together quickly, and we're fully focused on driving hard to deliver the value upside of this combination, and I remain excited to share our progress with you along the way. With that, I'd like to turn it over to the operator, and David, JB, and I will be happy to take your questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Please stand by for your first question. Your first question will come from Brian Craft at Deutsche Bank. Please go ahead.

Hi, good afternoon. I'd like to ask two if I could. I guess first, David, there's a lot of reporting in the press about film release dates being delayed and, of course, the canceling of Batgirl. I think that film in particular was almost completed. Can you just talk about the reason for the decision to cancel Batgirl? Was it an issue? And what's happening more broadly in Warner Brothers' film business? changes you might be making and basically the direction you're taking with the DC universe. And then just had one for JB on the fast product. Is the intent there to offer the fast service in Western markets like the US where consumers are accustomed to paying for content, or will it be more limited to markets where you've got, you know, where you would have a low penetration of paid services and therefore, you know, a way of building penetration where you might not otherwise achieve it? Thank you.

Great. Thanks, Brian. Well, let me start with the fact that the Warner Brothers Motion Picture Group has fantastic IP and a great history, as you know, with it turning 100. And between DC, the animation group, together with the entire Warner Library, our ambition is to bring Warner back and to produce great high-quality films. And as we look at the opportunities that we have broadly, DC is one of the top of the list for us. You look at Batman, Superman, Wonder Woman, Aquaman. These are brands that are known everywhere in the world. And the ability to drive those all over the world with great story is a big opportunity for us. We have done a reset. We've restructured the business where we're going to focus, where there will be a team with a 10-year plan focusing just on DC. It's very similar to the structure that Alan Horn and Bob Iger put together very effectively with Kevin Feige at Disney. We think that we could build a long-term, much stronger, sustainable growth business out of DC. And as part of that, we're going to focus on quality. We're not going to release any film before it's ready. We're not going to release a film to make a quarter we're not going to release a film under the focus is going to be how do we make each of these films in general as good as possible, but DC is something that we think we could make better and we're focused on it now. We have some great DC films coming up Black Adam, Shazam and Flash, and we're working on all of those we're very excited about them. We've seen them. We think they're terrific and we think we could make them even better. And that's what Mike and Pam and the team are doing, uh, and focusing on that. Um, strategically we've looked hard at the, at the director streaming business. We've seen luckily by having access now to all the data, how direct the streaming movies perform. And our conclusion is that expensive deck direct to streaming movies in terms of how people are consuming them on the platform, How often people go there or buy it or buy a service for it and how it gets nourished over time is no comparison to what happens when you launch a film in the motion picture in the theaters. And so this idea of expensive films going direct to streaming, we cannot find an economic case for it. We can't find an economic value for it. And so we're making a strategic shift as part of that. We've been out in the town talking about our commitment to the theatrical exhibition and the theatrical window. A number of movies will be launched with shorter windows. Some might have different kinds of marketing campaigns where we take advantage of us having the biggest platform and a platform that all motion picture companies look for. But we'll always be agile. Our focus will be on theatrical. And when we bring the theatrical films to HBO Max, we find they have substantially more value. And we have an ecosystem where we can have the premier motion picture business. That's why most people move to Hollywood. That's why most people got in this business to be on the big screen when the lights went out. And that is the magic. And the economic model is much stronger. And the other thing is that we're going to focus very hard on quality. I said we're not going to launch a movie until it's ready. We're not going to launch a movie to make a quarter. And we're not – we are not going to release a movie – And we're not going to put a movie out unless we believe in it. And that's it. I mean, particularly with DC, where we think we want to pivot and we want to elevate and we want to focus.

And Brian, on FAST, two quick comments. Number one is just a reminder that as we look at that space, the content we're talking about that would be in that kind of a product would be totally different than the content that would be in our premium SVOD offering. So number one, the distinction is totally different um and with over a hundred thousand uh titles across episodes across our combined portfolio there's a lot of content that wouldn't necessarily make sense in a premium product that might make sense in a fast the second thing is on a market by market look that's part of the assessment that we're going to under we're looking at and we'll look through over the next few months and as we have more details of how we think and where we think the opportunity is the richest we'll come back to you and take you through it just with the

The objective is to grow the D.C. brand, to grow the D.C. characters, but also our job is to protect the D.C. brand, and that's what we're going to do.

Great. Operator, let's head to the next question, please. Operator, next question, please.

Your next question comes from Jessica Reif-Ehrlich of Bank of America Securities. Please go ahead.

Thank you. I hope you meant questions. So if it's okay, I'd actually like to go around to each one of the speakers. David, one thing, I mean, you have an amazing set of assets, but one thing that's clearly being challenged are your linear networks. And I think the big surprise in Q2 results so far is how bad the video sub losses are in the U.S. So can you just talk about kind of your longer-term view of your linear networks? For JB, just on the content side, You know, it sounds like sports news are going to be an important part of your content strategy. How different is that from linear? How are you thinking about getting new content for direct-to-consumer? And then, Gunnar, just on the guidance, so if you take your 22 guidance of $9 to $9.5 billion plus $2 to $3 billion, I guess, of Synergy, we're at $11.5 to $12 billion for 23 as a base. But what about, if DTC's Direct-to-consumer losses are peaking this year and coming down. Can you give us color on the magnitude? You know, up front, it sounds like pricing was great. Films should be normalized. Where do you see the underlying growth?

Well, why don't I start with the linear business? Because we're big believers in the linear business. There is some secular decline. There's been secular decline. It's leveled off. It's declined more. In the end, You look at March Madness, the biggest numbers since 94. The NBA up dramatically. That was at a time when people said nobody below a certain age is watching. Well, they're tuning in for sport. They're tuning in for news. And when you look at the overall portfolio that we have, live sport, live news, together with entertainment and the best kind of branded nonfiction library where people get up, the lovers of food, of HG, of ID, and watch all day. So we think it's very hard to predict, but we expect it's going to be a very significant cash generator for us and a very good business for us for many, many years to come. We have a great team running it. This is what we do. It's what we know how to do. We have a team that's been doing this for 30 years. If the linear business is a race car, we've got a team of race car drivers. And when we hear a noise or it's in third gear, we know how to fix it. It's a business we know well. We haven't begun to implement the libraries that we have now where we could take content that's old documentaries on crime from HBO and put them on ID or take programming that exists in the library and move them on each of the cable channels or vice versa. So we're just, that hasn't begun yet. We also are first getting our hands around the idea that we are. We are very often the largest player in, in America in terms of our reach and the ability to use that now to tell people when, when they're watching hockey, you could come over now and watch discovery. And if they watch across each use our existing platforms to drive, uh, viewership from channel to channel. So, um, I've been around a long time. Broadcast was dead when I was hanging out with Jack in the 90s. That was what people said. But in the end, that reach and the ability to drive advertising product is what kept it alive. We're still seeing CPM increases. We were in the low to mid teens this time. We're big believers and we think that's going to help us. Having said that, the great thing that we have is we're going to have both sides. We have this very compelling free cash flow driver around the world domestically and around the world. And then we have the dual service, uh, HBO, HBO max and discovery plus coming together, uh, together with. Our, our full on over the next few years initiative of having a full basket in traditional and from free to, to, to premium, to add light in digital and a big advantage in that right now, HBO max has never been hotter. Quality is what matters. Quality is what Casey and that team is delivering. It's the best team in the business. We're doubling down on that HBO team. They're all committed under contract, and we're going to spend dramatically more this year and next year than we spent last year and the year before.

Jessica, on the sports and news for streaming, I guess I'd categorize it as on sports. It's really about experimentation that I'd say, and we're going to continue to be disciplined. We have essentially two experiments ongoing, which is one where we bundle sports, in this case, Champions League in Brazil and Mexico into our core entertainment offering at the same price as a really as an acquisition driver. And we are very happy with the results there. And then we got a second one in Europe where we upsell sports to a buy-through tier at a higher price point. And obviously, we'll be doing more of that now as we get closer to closing on our BT Sports deal in the UK, which probably will be the biggest experiment on that. And so we love the two experiments we have going. And I think we want to see that play out a little bit more to understand better what is the right strategy there. But we're going to stay disciplined and smart as it relates to sports. In news, I'd say it's really more about we see live news is still a critical, healthy, important part of the traditional pay TV ecosystem. And so live news will continue to be exclusively in that service. But that long-form factual programming from CNN in particular with their award-winning originals and CNN films That has a natural home and a huge demand that we can satiate now, initially on Discovery+, as we announced this morning, and then eventually sitting firmly within the future product as it comes together. And lastly, on news, we obviously continue to see outside of our kind of core streaming products with CNN.com and the CNN digital services, a lot more opportunities with over 100 million users across the world. to continue to experiment with that product and move potentially on ways to find not just ad-supported models, but other models where we can monetize that significant user base that comes to the service.

Okay. And then, Jessica, on the guidance, so just to recap, we adjusted our outlook predominantly for three reasons. The macroeconomic outlook that today is a little less supportive than it was 15 months ago or even in April when we last spoke. the industry dynamics in the streaming space, and then the differences that we see between projections made available to us prior to closing versus what we now view as the legacy one on the budget baseline post-close. And to answer your question specifically that your walk from the nine, nine and a half for this year to the 12 for next year, the math is obviously right. So you are right, $2 to $3 billion of synergy capture, as I said. I also do think that we're going to see some flow through from the course correction measures that we have implemented right after closing that should support the first quarter, second quarter of next year. So if you put that together, the answer is yes. I'm not really assuming any meaningful growth in the underlying or underlying growth in the business as usual in those numbers. The main reason is, as I laid out in the outlook for Q3, is the macroeconomic environment. There are so many factors right now. I just don't think it's prudent to a significant underlying improvement here in the core business. That said, we are super excited about the progress we're making on the synergy side. David spoke a little bit about the linear business. I do think that there are further cost opportunities there. So we'll keep monitoring the external factors. We will keep doing the work for the areas that we control and update you as we go along. Great. Thank you.

Great. Operator, let's go to the next question.

Your next question comes from Doug Mitchelson of Credit Suisse. Please go ahead.

Thanks so much for taking the question. Gunnar, following through on that, the 33% to 50% free cash flow conversion in 2023, what's holding that back from your usual 50% to 60% that you talk about? And does that get cured by 24% or is that long-term goal of 60% something that's going to, you know, feather in over a longer period of time? And, Jimmy, I'm just curious on, you know, What's your confidence level and the ability to increase engagement? It's a big driver, I think, of what you're trying to do. And as that engagement increases and you're able to monetize advertising at a higher and higher level, is the thought that you keep the price point and let that ad dollars flow through to the bottom line? Or do you lower your ad supported to your price point and try to broaden out the service? How are you thinking about pricing on the ad tier, particularly in the United States? Thanks.

Let me start, Doug, with your cash flow question. So bottom line, the drivers behind this, you know, a third to a half conversion guidance are essentially the same that I laid out for the EBITDA outlook. And then in addition to that, we obviously right now have a number of, you know, moving pieces and crosscurrents in our financials as we move through our restructuring, the cost to achieve for our synergy program. There will definitely be some CapEx requirements, and we'll have to see how the cadence for our content investment pans out. So these are all factors that are going to impact these numbers, especially sort of from a year-over-year basis. But to your point, I don't want to give guidance for 2024 yet, but I'm confident that we'll see continued progress towards that longer-term goal.

And Doug on the on the questions on the streaming on engagement, I'll tell you that there's three levers that we think are key and why we are confident in our ability to drive much better engagement. Number one is kind of a brand marketing point, which is obviously HBO and HBO Max has stood for something which was a very high quality premium scripted in particular drama series. They've never executed a real brand campaign. um to define what the new service is and as we think about rolling out our new service certainly we will be coming to market with a big uh noisy uh campaign uh expanding the proposition uh with a much much bigger content offering and so uh a we think the brand and the marketing component of this is significant second is obviously the content proposition will be drastically uh enhanced as we bring the two services together with a much more complete array of content across all the genres that i talked through earlier And then third, the product enhancement can't be underestimated. We see this from the HBO Max product today where limitations on search and discovery really limit the amount of content that is surfaced and viewed by users. And we are confident based on what we've seen from the Discovery Plus side and a much more, much broader use of content and a much longer use of watch time that we can actually get the combined product to see a much higher engagement level. That's one. On two, on the pricing, nothing to share with you at the moment. We're working through a bunch of different scenarios, but this far out from when we will come to market, we really don't want to discuss specific pricing yet, but we will certainly have more details for you probably as we go into 2023. All right.

Thank you. Thanks, Doug. Let's move on to the next question, please.

Your next question comes from Ben Swinburne of Morgan Stanley. Please go ahead.

Thanks. Good afternoon. I wanted to ask you about the longer-term outlook for direct-to-consumer, and I know we're going to hear a lot more at your investor day, so you might not have a lot of details, but it sounds like you're going to have a bit of a pause here in growing the business as you get everything over to one product and one tech stack. So when we think about that 40 million net ads, and the path to a billion of EBITDA, she would be thinking about that growth as being really kind of starting, at least in earnest, back half of next year. And so it's kind of 24, 25 when we'll sort of see what this business can do. And then I'm just wondering, David, you guys clearly have a view that sort of the streaming at all cost strategy is flawed. I think there's a lot of probably sympathy for that in the market today. You look back to 2019 when HBO was mostly wholesale. The business did like $2.5 billion of EBITDA, which wasn't that long ago. I'm just wondering when you think about the long-term opportunity here, can you get back to those kind of economics? I know you just laid out a 25 target, but did you entertain the idea of really rolling back the strategy more substantially or at least thinking about reclaiming those historical economics for the business? Thank you.

Ben, actually, let me actually take both questions because I think they're very related. So we laid out some building blocks for the longer-term outlook for D2C. And to answer your question specifically, there are obviously two drivers. One is the revenue growth and the operational gearing from that revenue growth. And I think, directly, you're right. As we said, we're going to be a little more cautious regarding marketing, et cetera, before relaunching. And so a lot of that incremental growth is going to kick in sort of after our JV has relaunched that product in the summer. The other point, though, is cost savings. And as we said before, D2C has a lot of synergy opportunity. We see savings opportunities and synergy opportunities across the entire cost side of the P&L, and that obviously is going to start kicking in earlier. And, I mean, you know, in the very short term, you know, we're all super excited about House of the Dragon. HBO is, as you heard David and J.B. say, you know, in the middle of the largest marketing campaign ever. So hopefully that's going to be a big helper for the very near term in this quarter. And then to your point about the long-term perspective, again, the $2.5 billion gap, I don't want to give an additional number here, but you heard JB say what we think is possible to be achieved, a billion in 2025, despite the fact that we're still seeing some startup losses in that number, even in 2025 for markets rolled out later. And we do continue to see, even for the combined company, a long-term margin opportunity of north of 20%. And that's on the basis of our combined model now with sort of fully fledged, you know, frameworks on the various cost buckets. So, you know, we're confident that this is going to be a great addition, an additional platform. And as we said, not a, you know, not being religious about turning the entire company into a, support pipeline for D2C, but D2C as one additional platform. So I think this is a great outlook. We're excited about it. We're committed, and we'll implement these plans and keep you posted.

You know, there was some buzz today about HBO Max, and we're going to start doing less series. Our strategy is to embrace and support and drive the incredible success that HBO Max is having. It's really the culture and the taste of Casey and the team and the fact that they not only read the scripts but they fight with all their creatives to make the content and storytelling as strong as possible. It's at a very unique moment. We think it's an extraordinary asset. It's an extraordinary advantage. I've said this before, it's not how much, it's how good. That aligns with us at Discovery as well in the content that we've been doing and the characters and the way that we drive brand. But the majority of the people on Casey's team have been locked up. Casey is here for the next five years. and we hope longer. He's truly a unicorn. His ability to relate to talent, to make content better, his leadership. And you see it in what's been coming out of HBO and how it's affecting the culture and the energy and what people are talking about. But we want it to be broader. Casey and the team want it to be broader. And we're starting to have some real success. We're now going to put in everything that's on Discovery+. and all that original content, as well as some of the premium content from CNN. And it'll be the home of all of that. And we will, as one company, come behind that. And we think that that product is going to be superb. And it's about curation. It's about quality. It's about how good. And so the center spoke of that is the quality of HBO Max and that team. We've already started creative meetings within the HBO Max team together with, we now meet once a week, all the creatives at the company. That's something that we've initiated with me on the lot in person, in addition to the multiple overall staff meetings. But the creative meetings with everyone together has been really effective and a way to not only talk about but talk about how do you share content and how do we help each other with great talent. So very encouraged and very supportive.

And, Ben, as you probably can imagine, the number one thing in our view for a successful streaming service as a business is to get churned down and to have a low churn number. At the end of the day, having great but small amount of appointment viewing series The challenge is people come in and then they go out if there's nothing else. And ultimately the breadth of the offering matters to get the churn down so that there's something for everyone in the household, everyone in the family. And we've seen it across all our data points where the more people you have in a household using the service, the stickier it is below your churn is the more viable our businesses. And so at the end of the day, putting all the content together was really the only option we saw to making this a viable business. And as David said, I think it's important given some of the noise, but that HBO and the Max originals remain, you know, the unequivocal home of the best premium television. And it remains the centerpiece of our combined streaming platform, given the quality that's coming out of Casey and that team.

Oh, and J.B., I should have mentioned as well that as part of our projections, That's the part that's going to continue growing. We're spending as much as never before, and we intend to keep growing that spend for HBO content, to be clear.

I appreciate all the color. Thanks, guys.

Thanks, Ben. Operator, let's take the next question.

Your next question comes from Robert Fishman of Moffat Masonson. Please go ahead.

Hi, good afternoon. I have one for David and one for JB or Gunnar. David, you discussed continuing to sell content to third parties. Can you just help us in how you're thinking about HBO's strategy to sell content to Sky going forward in lieu of launching DTC directly in those markets? And then for J.B. Arguner, can you address how do you plan to allocate your future sports costs like the NBA renewal to DTC or how important the AdLight or FastPod platforms play into your billion-dollar EBITDA target or achieving that 20% long-term TTC margin.

Thank you. Great. You know, in Legacy Discovery, we own together with Mike Fries and Malone, all three media, we had 30 production companies, and we would look in awe at Warner Brothers Television as really the greatest and largest and most highest quality production operations. And the incredible names and talent that they have. And so the legacy of Warner is creating great content and selling it. Well, I mean, less built a big business, um, by, by carrying all of Warner brothers content. You know, I've said it before when we were at NBC, it was must see TV, Jack Welch. When, when the, when the content, when the entertainment guys left the room, he said it was Warner brothers, TV, the maker, they are a maker and the greatest maker of content. That's the heritage of this company. Um, we want to sell to third parties. It's a very profitable business for us. We think it could be more profitable. Um, there's, there's a lot of money being spent for the best content. We have some of the best of it. Um, and we want to continue to do that and we're going to do that. In addition, we have a huge library of content and strategically, um, we are pivoting to the decision of anything that's important to us, to growing HBO, HBO max. sitting down with Casey, sitting down with JB, going through the data, what's critical to us, we're going to keep that exclusively. What kind of content could be non-exclusive and have no impact on us? Why should we want to monetize that to drive economic value? And then there's content that we're not even using right now. So, you know, massive amounts of TV and motion picture content that we're not using. So do we use that to just develop our own best-of-class free platform? Do we sell a lot of that? And that's what we're going to come back to you with.

And on Sky specifically, Robert, we obviously have multiple years left in our existing and important and longstanding relationship with them. And so we don't have to deal with that question at this point. Sky, the deal, as we talked about, has another – is outside of the 2025 time horizon that we gave you projections on. And so as we get closer to the end of that deal, we'll certainly come back to you with further thoughts as to how we go to market in those three markets.

And then, Robert, just to clarify two things. Number one, that any FAST activity is not part of the guidance that we laid out earlier. Again, we'll update you as we go along. To the point about allocating sports costs, I just want to make one thing clear. So the way we're now segmenting the business is following the structure, you know, how David looks at the business. That informs sort of the segment reporting structure. But importantly, we're also treating these individual segments essentially as individual units. And that means that all the inner company activity, revenues and costs, are essentially negotiated on an arm's length basis. So from that perspective, you should assume that any content, you know, sports or otherwise, is going to be accounted for at essentially fair third party terms. And you will see this leads to a bigger chunk of eliminations in our consolidated, you know, what I think is the best way to really clearly and fairly show the actual economics of the businesses. And needless to say, is also important from the perspective of our partners in the studio space. It's very important that we account at fair market values in third-party terms.

Great. Thank you all.

Thanks, Robert.

Thanks, Robert. Operator, next question, please.

Your next question comes from Michael Morris of Guggenheim. Please go ahead.

Thank you, guys. Good afternoon. I'd like to ask one about HBO and the HBO brand. I know you're going to share more with us later in the year, but there's been some press indications that maybe You don't feel like the HBO brand itself is broad enough or doesn't have as much value maybe on a global basis as you would be looking for. So I'm curious if you can share anything about how you feel about that brand and the future of sort of maximizing that. And my second question for Gunnar, when you were discussing the items that have impacted your projections, You mentioned a couple of times change in streaming industry dynamics, I guess, relative to when you initiated the merger. I'm hoping you can expand on that a bit. So I understand that valuations have come in, but maybe could you be more specific on the dynamics that you see now is impacting the industry or the profitability of the business that you didn't see a year ago? Thank you.

Thanks, Michael. Well, first, I think the HBO brand is one of the great crown jewels of the company and represents such so much and how we all got introduced to, um, to really what premium television and series were really all about. Um, we're going to look at where we continue to look. Uh, the data right now is more and more. If you look at how people see HBO max, uh, more and more people are saying that's the place they go. That's the place that they prefer. It's the place that has the highest quality. Um, that, that data looks different than it did a year ago. It looks different than it did six months ago. So we're talking to consumers and we're evaluating and we'll let you know when we make a determination.

Also, the HBO brand, no matter what, as David says, being a crown jewel will live on. There's a difference between what the service may eventually be called or not. versus what HBO is. HBO will always be the beacon and the ultimate brand that stands for the best of television quality. So that remains unchanged in any scenario in our mind.

Whether it's in the Topko name or not. And we'll keep you posted as we make a final decision.

And then, Mike, on the industry dynamics, look, I think it's clear that over the past 12 months and even more so over the past six months maybe, a lot of the viewpoints here have changed. And most importantly, when it comes to industry-wide subscriber growth, top-line growth, And obviously, you know, a lot of the cost structuring decisions specifically for content sort of, you know, are being made, you know, 18, 24 months in advance. The most important point here for us is sort of the strategic response as JB laid out is, you know, one that focuses on value and on revenue rather than purely, you know, subscriber numbers. And I also think if you take a step back here from a longer term perspective, The way I look at the changes in the industry, I view that actually as additional support for how we have all along been describing our strategy. D2C is one platform in a larger portfolio of assets and in a larger lineup of distribution outlets. We're not going to be religious about driving hard to fuel just one platform. D2C has its space, and Warner Brothers Discovery is uniquely positioned with the enormous surface area with our customers to service them and to tell great stories for decades to come.

Okay, thank you. Let's move on to the next question.

Your next question comes from John Hodluck of UBS. Please go ahead.

Great. Thanks, guys. And thanks for all the information this afternoon. First, on the content spend, we had you guys down for between $17 and $18 billion on a pro forma basis in cash content spending. And David, on the back of your commentary that you're going to spend dramatically more, can you give us an idea of how that grows over the next... First of all, if that's in the ballpark and how that grows over the next six years or next few years as you reach those 25 targets. And then on the... The sub-growth, you laid out sort of needing 40 million subs to hit those targets. How do you see that broken down in terms of U.S. versus rest of the world? I mean, I think most of the growth you've been seeing recently has been rest of the world, and you've had some speed bumps here in the U.S. with Amazon and AT&T. But do you expect to be able to reignite U.S. or domestic DTC growth as you guys roll out the new product? Thanks. Thanks, Mark.

Look, we will... We're going to spend significantly more on the HBO Max product and other areas will spend less because we're not finding an effective return. In the aggregate, we're going to spend more money on content. We're a content company. That's our product. That's what we do. We want the best creatives here at Warner and at HBO and at Warner Brothers Television.

and across our traditional platforms creating content and we've worked in the budget uh that that content spend will go up um in each year in the years to come um jb yeah i mean i think um uh you know we we ultimately are going to be measured in terms of our spend as david said we were reprioritizing what we're going to invest in um in terms of the uh of the penetration uh obviously the u.s uh the hbo max discovery plus products are more penetrated than we are in much of the international market so by math we will see more growth coming from outside the u.s from inside u.s but nonetheless we do see uh still a meaningful opportunity to get greater penetration in the u.s even if the total numbers inherently of that 40 million will likely skew uh more to international just because of the size of the opportunity but the number

The number on the corner of JB's desk and mine is the break even and the one billion. If we do that, I don't really care what the number is. We're not in the business of trying to pick up every sub. We want to make sure we get paid. We get paid fairly. We have very high quality content. In many markets, we should be paid more because we're providing dramatically better content and more robust content and higher quality content. If the number is 122 and we're making over a billion, That is the number for us. We're going to grow subs significantly, but we want to drive profitability and free cash flow.

And then the one other point that I would want to make on the content spend is to the point that David made, we're ramping up content spend. Both companies have been spending more and have been renting up the cash spend. So, you know, that should be viewed as one of the drivers as well for the society to do a cash conversion also into next year as amortization over time catches up with the higher spend as we grow our business.

Makes sense. Thanks, guys. Okay, thank you. Next question.

Your next question comes from Jason Bazinet of Citigroup. Please go ahead.

I just had a very basic question. If you guys penciled out the streaming business, the DTC business, and it was demonstrably better than linear, you'd be jumping in with both feet, right? And as Swinburne said, I think the market agrees with you that they don't really see that today. And so they understand your sort of path to pursue both linear and DTC. My question is this. Do you think there's something – endemic to the DTC business that will always make it worse, like churn or the amount of content you have to put into the app to make it relevant? Or do you think it's something that is potentially transitory, like the pricing is just too low today, and if the industry dynamics change and pricing goes up, it could be, in fact, a business that's as good as linear?

Thanks, Jason. First, I think having both is a gift. This is a fully balanced company. We have our linear and free to air. We're a big maker of content for profit. We have gaming where we take our IP into gaming for profit. We have the motion picture business to gather some of the greatest talent in the world for profit. And then we have our streaming. So having the amount of free cash flow that we're driving to in order to fund and support thoughtfully The streaming business, which is critical as we transition, is a gift. I do think the business is going to change. They'll be probably over time, they'll be repackaging. They'll probably end up being a couple of the best services, which we expect and will drive to be. Um, uh, and there'll be repackaging either by the programmers or by, uh, by intermediaries like an apple or a Roku or an Amazon. Um, and the experience to consumers will become easier. And as it becomes easier, you know, some of the, the, some of the economic terms and churn, uh, may change. I believe it's over that it's underpriced. You know, what, what has ended up happening is it was a reaction to the capital markets. Let's just go ahead and collapse businesses, overspend on content. People have shown that they were very happy to buy HBO, Showtime, Epix. There's a big group of people in America that love premium television. There's a big group that love a robust bouquet of opportunity. And they're willing to spend a lot of money domestically and outside the U.S., not as much, but they're willing to pay. It was a decision to say, why have them pay a lot? Let's just collapse everything in them. spend, spend, spend, and then charge very little. And I think that was supported by this idea, like clicks in the 90s, that subs were going to be great currency. And so we're going to be very sensible. We're about free cash flow. We got the best library, we think, and the highest quality content. We think we could build a great business, streaming business to touch everyone, but we're not collapsing businesses on it. And I think sensibility will be that there'll be a lot of people that are willing to pay a lot more for the quality that we have.

Yeah, and maybe just to add to that, just quantitatively, look, I wouldn't judge, you know, a business, you know, by how it compares to a, you know, 40, 50% linear business, right? That's, I mean, I think that's well understood that that's a high bar. You know, we spoke, we reiterated earlier that we see 20% plus margin potential for the D2C business. we are assuming moderate to price and ARPU increases as JB laid out. And look, at the end of the day, the last thing I would also say is it's not either or. I mean, the strength of our business and our opportunity here is the fact that we can manage these various distribution outlets at the same time. And I think these ecosystems will coexist for a very, very long time. And that's where we really get the superior returns for our content investments that were able to monetize the content and get a return on every dollar spent across so many platforms.

We effectively have four, five, or six cash registers. If there's a cash register where a consumer can come in and either watch or pay for a piece of content, we have every platform in the ecosystem. And in a world where things are changing and there's a lot of uncertainty and there's a lot of disruption, To me, that's a lot more stable and a lot better than having one cash register.

Great. Thanks, Jason. I appreciate it. Operator, if we could take the last question, we'd appreciate it.

Your next question comes from Doug Krutz of Cowan & Co. Please go ahead.

Hey, thanks for getting me on. With the rollout of the combined product next summer, obviously you have two separate products now that have pretty different content offerings and pretty different price points. How conceptually do you plan to manage that transition? Are you going to allow people who are subscribed to the legacy services to remain on those services? Are there going to be forced conversions? Can you talk a little bit how you envision that playing out? Thank you.

Yeah, Doug, we will have a, you know, a migration plan that will allow obviously some element of particularly, you can imagine the the lower price this every plus subscribers, for some period of time to grandfather into the new product, and migrate them, or migrate as many of them as possible up to the new product. And so that is all part of the transition plan to obviously get people optimize the number of subscribers that we retain, but at the same time, at some point, make sure that the people who are on the service are stepping up at some point in time to the inevitable higher price point than the current Discovery Plus prices that are at today. So there will be a transition plan that maximizes essentially retention of subscribers, but ultimately also gets to the right ARPU and price points over a relatively short period of time.

Thank you.

Great. Thanks so much, Doug, and thank you, everybody, for joining us. And that will conclude our call.

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for your participation and ask that you please disconnect your lines.