Warner Bros. Discovery, Inc.

Ladies and gentlemen, thank you for standing by. Today's conference will begin in approximately two minutes to allow as many participants as possible to join. Until that time, your lines will again be placed on music hold. We thank you for your patience. Ladies and gentlemen, welcome to the Warner Brothers Discovery second 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 Slabin, Executive Vice President, Global Investor Strategy. Sir, you may now begin.

morning, and welcome to Warner Brothers Discovery's Q2 earnings call. With me today is David Zasloff, President and CEO, Gunnar Ridenfels, 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 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 affect these expectations, please see the company's filings with the U.S. 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 Q2 earnings release, trending schedule, and accompanying slide deck will be available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

Hello, everyone, and thank you for joining us. When we merged the two legacy companies and launched Warner Brothers Discovery 16 months ago, we did so with the ambition to be the greatest media and entertainment company in the world. And we continue to carry out our attack plan in all areas of the business. When you look back at what we said we would do, we're doing it. We said we were going to reimagine the company for the future and focus on free cash flow and delivering the balance sheet. And we are. This quarter alone, we generated over 1.7 billion in free cash flow. and we're anticipating about the same in Q3. This is the result of the hard work of our teams who have been bold, decisive, and disciplined. We've restructured our businesses for the future to position them to drive both profitability and long-term growth, and the results have been significant. And as a further sign of our confidence in our free cash flow capability, This morning, we announced a tender for up to 2.7 billion of our short-dated debt. We paid down 1.6 billion in debt in Q2, bringing our total debt retirement before today's tender to 9 billion since the merger. And as we've said, we expect to be comfortably below four times levered by the end of the year. firmly within the investment-grade rating by midpoint next year, and at our target of 2.5 to 3 times gross leverage by the close of 2024. With our free cash flow and leverage targets in sight, we are better positioned to lean into top-line growth opportunities across the company, and that's increasingly been our focus, starting with direct-to-consumer. We said we were going to build a strong, sustainable, direct-to-consumer strategy focused on profitable growth as opposed to chasing subs at any cost. And we are. In fact, we continue to track way ahead of our own financial projections. And as we told you last quarter, we expect our U.S. direct-to-consumer business to be profitable for the year 2023. this year, a year ahead of our prior guidance. In fact, our global direct-to-consumer business was roughly break-even in Q2 and modestly EBITDA positive for the first half of this year. And our U.S. direct-to-consumer business is generating healthy EBITDA, which is helping to offset international losses, even with the product development costs. and sizable marketing campaign associated with the launch of Max. The migration to Max has gone exceedingly well, with the overwhelming majority of subscribers in the U.S. successfully transferred. While we have seen some expected subscriber disruption, we have experienced lower than expected churn throughout this process. And by all measures and third-party metrics, the consumer experience is top notch. The most important metric at this stage, only two months into our launch, is the amount of time people are spending watching our content. And we're seeing early and encouraging signs of stronger engagement. And they're not only watching for longer, they're also exploring new genres, adventure and discovery, true crime, home improvement, and other nonfiction content. The mix of blockbuster originals from HBO, together with the nourishment and great personalities found on Discovery Plus content, makes for a very compelling content proposition, truly something for everyone. We're preparing to launch Max in markets around the globe over the next year plus. There is significant opportunity internationally in markets we have yet to attack, and importantly, The platform now has full capability to deliver live programming. We'll have more to say about that soon. While Max will be a cornerstone of our company's growth, we also see great potential across a number of our other businesses. One is gaming. We're the only company among our peers scaled in gaming. Next up is Mortal Kombat 1. the highly anticipated new title in the acclaimed 30-year franchise, set for release next month. This comes on the heels of the success of Hogwarts Legacy, which is still the biggest game of 2023. And there's more planned, including the launch of Hogwarts Legacy on the Nintendo Switch in November, just in time for the holidays. More broadly, we are positioning our gaming business to be a much more strategic piece of our IP and consumer engagement puzzle. And we're investing accordingly. At Warner Brothers Discovery, we're one of the largest makers and sellers of content in the world. And it's quality content people want to watch. We had an industry-leading 181 Emmy nominations, including 127 for HBO and Max. the most of any network or platform. As a critical supplier of some of the most highly resonant television series, we are adding incremental asset value to our world-class portfolio. And as we window that content around the globe, we expect to continue to see a tailwind of growth in our production business. Likewise, we have real ambition for the future of our motion picture business the wake of the creative tour de force and global cultural phenomenon that is barbie while the studio's performance has been challenged in recent years and they've clearly under earned their potential we are taking meaningful steps with respect to the creative direction of both warner brothers pictures group and dc and a key facet of this strategy will be to lean into some of our great underutilized storytelling ip it's been 10 years since we made a standalone superman movie and nine years since the last lord of the rings feature for example for many years the secret to warner brothers profitability was tentpole films they'd make two to three of them together with a slate of new original content and that was the winning formula we too believe in the power of tent pulse featuring great IP recognized by people everywhere in the world, our core strength, and we intend to get back to doing what we know works. While we've still got lots to do, we're very optimistic about the growth potential of this business. The culmination of what we're doing at both our film and television studios is further bolstering what is already among the industry's biggest film and TV libraries. And this asset offers a wealth of opportunity in terms of feeding our own platforms as well as others. It's a mainstay of our business to create great content and window it through, creating value in each window. And as you would expect, a lot of analysis and strategic discussion goes into these decisions. In some cases, we'll want to keep premium content exclusively on our platform for a very long time. In other cases, we may sell it to third parties and we don't lose anything by growing the pie. The fact is licensing some library content to other SVOD platforms like Netflix or Amazon as part of a co-exclusive agreement is just smart business. We're expanding our audience while maximizing the value of the asset and providing more revenue streams. And that is our job. to optimize the windowing to get the best possible return on investment. We're also a global leader in sports, including great sports rights from many of the top leagues in the U.S. that in many cases run through 2028 and beyond. We have the best digital and social sports platform for younger fans in Bleacher Report. And we have significant digital rights in the U.S. that we're not currently deploying, but plan to in the future. And that has a real chance to create meaningful strategic values. We've had some good success in Europe and Latin America with layering sports into streaming with various business models. And this experience is informing our view on how to best deploy these sports rights here in the US. Our recent venture with BT in the UK is a great example, having merged BT Sport with Eurosport UK. What is now called TNT Sports is available on both linear and streaming and bundled with Discovery Plus, our current streaming entertainment product in that market. We believe there's significant opportunity in the streaming space for sports, and we look forward to leaning into this incremental growth avenue. Underpinning all of the work we are doing is our strong commitment to operating Warner Brothers Discovery as one company. Consider Barbie. Early this year, we created an attack plan for the summer of Barbie in anticipation of the launch of the movie, which broke records and is now approaching 1 billion in global box office. Over the last six months, every area of the company has played a part in promoting this great film. From the four-part series Barbie Dreamhouse Challenge on HGTV, which premiered in the U.S. to 4 million viewers, and was then broadcast across 146 countries, to Food Network's Barbie-themed Summer Baking Championship, to Turner Sports' sneak peek of the film during the NBA Eastern Conference Finals. It has truly been a one company effort. This is one of the big differentiators and super strengths of Warner Brothers Discovery, where a property or title can benefit from eventizing it across our global platforms, we're able to put the full weight and power of all of our diverse media assets, domestically and globally, behind it to drive awareness and excitement. And the result is truly unmatched. Of course, in light of the cyclical and secular headwinds facing the industry, we are working through some challenges. With respect to Linear, The fact is we have a uniquely different hand, one that we believe makes us more resilient. On any given night, we reach an average of one-third of all cable viewers, and it's a great platform for driving our brands and products, as we saw with promotions for Max, Barbie, and Shark Week. Our ability to make unscripted content quickly, inexpensively, and tailored to viewers' preferences is also a key differentiator. And we believe this optionality provides us with greater longevity and sustainability. At the same time, we've worked really hard on driving efficiency and productivity, enhancing our margins, recognizing that we need to do that because the overall business is facing secular decline. That said, it's still generating real meaningful free cash flow that we are able to use to fund growth. While the linear business is being further challenged by the soft ad sales market, we do see cause for optimism. We've nearly completed the U.S. upfront, and our volume is up, and our price levels are consistent with prior year.

A very good result in a tough market. One more thing before turning it over to Gunnar.

At Warner Brothers Discovery, we're in the business of storytelling. Our goal is to tell great stories, stories with the power to entertain, and when we're at our best, inspire, with stories that come to life on screens, big and small. And we cannot do any of that without the entirety of the creative community, the great creative community, without the writers, directors, editors, producers, actors, the whole below the line crew. Our job is to enable and empower them to do their best work. We're hopeful that all sides will get back to the negotiating room soon and that these strikes get resolved in a way that the writers and actors feel they are fairly compensated and their efforts and contributions are fully valued. With that, I'll turn it over to Gunnar and he'll take you through the specifics of the course.

Gunnar.

Thank you, David, and good morning, everyone. We have been hard at work at WBD, and much of our focus over the past 15 months has been on driving thoughtful efficiencies, merger related and otherwise, and on implementing a cash flow mindset across the whole company. Our second quarter results demonstrate the fruits of that labor. Our discipline transformation efforts have not only been a key factor in our ability to drive financial outcomes, but they have also made us ever more confident in the strategic vision we presented early on following our merger. Simply put, we have begun to conduct our business fundamentally differently. And so much of what we identified very early on as near and long-term potential, we are beginning to realize. These are durable performance improvements born out of true change. and we see a lot more opportunity. To that end, adjusted EBITDA grew 23% in Q2, marking the second consecutive quarter of meaningful year-over-year adjusted EBITDA growth. Year-to-date, adjusted EBITDA is now up more than $600 million, despite a persistently challenging macroeconomic backdrop. We have accelerated the delivery of our transformation initiatives where appropriate, and have already delivered more than $2 billion in incremental cost synergies thus far this year. This has allowed us to offset the impact of the market challenges and grow profits while at the same time funding many foundational investment opportunities. Our transformation team is still very much focused on generating new initiatives, and based on the successful implementation I am seeing and the size of the funnel, I am confident that we'll achieve $4 billion in total synergies much sooner than previously thought and now see a clear path to achieving $5 billion or more through 2024 and beyond. Our second quarter free cash flow of over $1.7 billion is strong proof of these efforts. Clearly, it was a healthy number and nicely ahead of our expectations. I am incredibly proud of this result. not only because it allows us to continue to quickly deliver, but perhaps more importantly, I'm excited because this outperformance is coming through across a number of components of our cash flow statement. And I view this as true cash focus becoming evident across the company. Key factors of the outperformance were number one, slightly better than expected adjusted EBITDA. Number two, improvements across virtually all elements of our working capital and other below the line items. part of a very long runway of opportunity that we're beginning to chip away at. Number three, the closing of the gap between content cash spend and amortization, partly due to shifts in the timing of productions and partly as a result of implementing our new content strategy initiated last year. Number four, modest cash savings from the impact of the WGA and SAG-AFTRA strikes, which we estimate were in the low $100 million range during the quarter. We also absorbed $200 million of cash restructuring and integration-related expense during the quarter in line with our expectations. We repaid over $1.6 billion of debt, $1.1 billion of the term loan, and over $500 million of notes. As you saw, we launched a tender offer this morning for up to $2.7 billion of notes that are maturing through the first half of 2024. Our net leverage came down significantly this quarter and is now at 4.6 times. Consistent with our capital allocation policy, we remain focused on debt pay down and have a clear path to net leverage nicely below four times at the end of the year and reiterate our expectation to achieve target leverage of two and a half to three times gross by the end of 2024. Turning now briefly to the segments, which I will discuss as always on a constant currency basis. Starting with D2C, I'm very encouraged with the results that effectively break even EBITDA quite a bit better than we expected, notwithstanding the significant investments in the development and marketing of our new max platform in the U.S. Q2 nicely demonstrates the underlying traction and efficiency from the integration of legacy D2C operations and organizations. I do want to call out why we saw growth across all free revenue streams, content was a standout. helped by the timing of licensing deals. And while selling content to third parties has been and will be a core element of our company-wide operating model, we would expect some smoothing out of content licensing in the second half of the year. We saw a sequential net subscriber loss of 1.8 million in Q2. As expected, trends were impacted by overlapping subscriber bases between Max and Discovery+. expected churn from the end of some key 10-pole series, such as The Last of Us and Succession, and wholesale declines, including the unwinding of some very low ARPU international wholesale distribution deals that were struck under the prior strategy that prioritized subscribers over ARPU profitability and value. And with respect to the overlapping subscriber base, we did see several hundred thousand subs churn off during the quarter. meaningfully less than we had anticipated and while we do expect to see some more elevated churn on discovery plus we also see engagement patterns consistent with what we saw prior to max launch making us optimistic that our strategy to keep offering these two products was the right one for customers and for our business our streaming team really did an outstanding job with this transition we continue to see traction on the streaming advertising opportunity supported by gains in ad-light subscribers, early initiatives on HBO and Max Originals, and increased engagement. While the overall advertising market remains soft, we see the streaming and advertising opportunity well-positioned to benefit from secular tailwinds over the long term. This is particularly true against the backdrop of the enormous value of some of our iconic shows for advertisers, who in the past had no access to this inventory. We remain focused on further scaling this segment of our offering, And the relaunch of Max will certainly be a driver, both here in the U.S. and later abroad. I am proud of the meaningful strides we made in the first half of the year and see D2C as an important contributor to total company profit growth year over year in the second half. Turning to studios, the studio's performance has clearly been inconsistent. Our box office results in Q2 underperformed our expectations, which weighed on financial results. And it's ironic to have to say that, given how incredibly successful Barbie has been, impacting Q3, of course, not Q2. Unpacking this a bit, overall content revenues declined 25% due to, number one, the slate, as I mentioned, as well as the timing of production of certain TV series and fewer CW series orders following the Nextar transaction. Number two, lower internal sales to networks and D2C, in part resulting from the more disciplined content investment and programming approach we've implemented. such as exiting direct-to-max movies or certain scripted series on linear for which we felt ratings did not justify the investment. Please note, these lower revenues are offset in lower eliminations on the group level, but impact the segment level revenue. And number three, finally, in gaming, the Lego Star Wars game was released in the second quarter last year, which created a tough comp for this year. Looking ahead, We're naturally delighted with the performance of Barbie thus far, which is now approaching $1 billion in global box office, and we're excited about its prospects through its remaining monetization window. For the remainder of our feature films this year, as well as Warner Brothers television productions, release dates and performance expectations are naturally fluid given the ongoing strikes, and we will evaluate our options and update the market accordingly. But it is possible we will see greater variability against our forecast. Turning to networks. Advertising decreased 13%. As we called out last quarter, we faced tough comparisons as we did not have the NCAA Final Four and Championship Games this year. And although we did have the Stanley Cup Finals for the first time, the net impact of these two sporting events was an approximate 200 basis point headwind. Adjusting for this, we did see underlying sequential improvement. I would characterize the broader tone of the marketplace thus far in Q3 as similar to that of Q2. certainly here in the U.S., while international markets are broadly a touch stronger. That said, as David mentioned earlier, we are making strong progress on our upfront field. Key call-outs from my perspective are, number one, linear volume expected to be up, with pricing on balance pretty consistent with the prior year. Number two, DTC volume is up more than 50% in the marketplace in which CPMs were positioned to drive scale for us as much as for the broader market. While visibility overall remains limited and the scatter market inconsistent, we expect continued modest sequential improvement through the end of the year and forecast global networks advertising revenues will decrease in the high single-digit range during the second half of the year, with Q4 sequentially better than Q3, which is overall meaningfully worse than our forecast from earlier in the year. Distribution revenues decreased 1%. modest improvement versus last quarter as we continue to be pleased with the pricing and tiering of our networks and renewals representative of their importance to both traditional and virtual bundles before wrapping up the segment discussion i'd like to offer an update on the at t sports nets i am very pleased to say that we have been working diligently with the respective leagues and teams to formulate a plan to exit the RSN business in a manner that minimizes the disruption to teams and their fans. We expect each of the networks will be sold or operations seized by the end of the year. While we've positioned these to operate at adjusted EBITDA breakeven, this business generated nearly $400 million of revenues in 2022 and skewed heavily towards distribution revenues. As these networks are sold or wound down over the next few months, we expect a modest impact to Q3 distribution and advertising revenues, with a more meaningful impact in Q4 and into 2024. Turning to guidance and our outlook for the year, let me start with our most important financial metric, free cash flow. For Q3, I expect us to again generate free cash flow in the $1.7 billion ballpark, reflecting similar underlying trends as in Q2, with sequentially larger savings from the strikes, as well as the success of Barbie, notwithstanding the roughly $900 million of semiannual interest payments. And based on this outlook, the health of the underlying free cash flow drivers, and further opportunities in the pipeline, I see full-year free cash flow in the range of $4.5 to $5 billion. This also assumes cash restructuring and integration-related costs for this year of roughly $1.2 billion, which is a couple hundred million more than our prior expectations. For adjusted EBITDA, I am now assuming we'll settle towards the low end of our target range of $11 to $11.5 billion. The key drivers for the final outcome will be centered around ad sales, B2C profit growth, and contributions from the studio segment. Let me provide some puts and takes. First, the timing and magnitude of a potential ad market recovery continue to be the most important driver of upside and downside to our results. Second, the D2C segment has been a driver of our year-over-year EBITDA improvement, and we expect that to continue, helped by efficiency gains and top-line benefits. We C-segment EBITDA losses of no more than a couple hundred million dollars for the full year of 2023. Third, uncertainty in the studio segment has increased with the dual strikes. This may have implications for the timing and performance of the remainder of the film slate, as well as our ability to produce and deliver content. And while we are hoping for a fast resolution, our modeling assumes a return to work date in early September. Should the strikes run through the end of the year, I would expect several hundred million dollars of incremental upside to our free cash flow guidance and some incremental downside for adjusted EBITDA. When I take a step back, notwithstanding the factors influencing the broader landscape, I am more and more convinced that the dedicated work of the leadership team and efforts throughout the company marked by a meaningful shift in mindset about how to manage this company, is starting to pay dividends. I believe our financial results this quarter speak volumes about this change. I am very confident in the trajectory of our delevering and debt paydown, the benefits of which will increasingly allow us to turn our dedication and focus to support further growth initiatives to ensure long-term, sustainable, and profitable growth ahead. With that, I'd like to turn the call back to the operator and tag your questions.

Thank you. If you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press star 1 again. One moment, please, for your first question. Your first question comes from the line of Vijay Jayant with Evercore ISI. Your line is open.

Good morning. This is on for VJ. Thanks for taking the questions. One on M&A and one on the synergies. First on M&A, based on commentary from your peers, it seems like there might be a willingness from some to reshape the media landscape a bit and that certain linear or maybe even streaming assets could swap hands. From your end, it seems like there's a lot of comfort in getting to your leverage targets. The synergy capture machine is firing on all cylinders. Free cash flow should ramp going forward. And of course, The second anniversary of the merger's close is not too far away. So can you talk a bit about your latest views on M&A and what's your appetite from a strategic or financial lens? And on synergies, Gunnar, can you expand on your comments earlier a bit and help us understand where this increase to $5 billion is coming from? And how should we think about the timing flow through in 2023 and 2024? Should we expect this $1 billion upside will mostly be reinvested in business? And are there any changes to the total cash costs to achieve that we should be mindful of as we think of free cash flow over the coming years. Thank you.

Thanks. Let me just start by saying the team has really worked hard the last 16 months to restructure this business for the future, to build a business that as a real storytelling company where we can continue to invest our meaningful free cash flow to serve all of our diverse businesses. So the de-levering that we're doing now, which is really accelerated and is accelerating, is a key element of making this turn. And we've already started to focus on each of our businesses now for growth. We like the businesses that we have. We have a diverse set of assets, global reach, great tent poles that have been underused that we could now get into, whether it's Harry Potter or Lord of the Rings. the whole DC plan for the next 10 years. And so we feel very good about our hand, and our focus now will be finish the de-levering, which we've made the turn on now and is clearly in sight, and focus on our own growth, which we think we give the same attention to and the same rigor.

Yeah, and talking on synergies, the headline here is, As David has said so many times, we have completely changed the way we're running business here. This is not about synergies. This is not about integration. It's just a fundamental shift in mindset that continues to come through. And again, you saw the free cash flow number in the second quarter. I'm just amazed by the results, and it's coming through everywhere. And as I said, there was a small strike impact here. But without the strike, it would have been a $1.6 billion number instead of a $1.7 billion number. I'm pointing this out because it's not one or two things that stick out here. It's cash coming in everywhere across the P&L and then below the line. And so, as I said a minute ago, we've achieved the $2 billion of incremental value capture with our transformation initiative. I do see $5 billion or more. And again, as we've said before, a lot of that is going to hit in 24 and beyond. We're still in the early innings of many of our systems transformations. I pointed this out before, we're rationalizing 260 systems across the company. So all of that is still in the pipeline. To your point, where is this coming from? It's the same point that I've made in the past. It's really just looking at what's in the system. And we have a very significant cushion in terms of the overall savings amount tied to all the initiatives that the company is working on. And I'm just looking at how those are flowing through the implementation milestones. And I have full confidence now that we're going to get $5 billion or more. And we'll continue. Again, this is not an integration exercise. It's a transformation of the entire operating model for the company. And yes, we're going to be reinvesting some. We actually have reinvested some. If you look at the numbers, I said $2 billion have flown through in the first half of the year. We've obviously not grown profits by $2 billion. We've used some of that to offset the tougher macro environment. And we've used some of it to fund the investments everywhere in the company.

That's great. Thank you both.

Your next question comes from the line of with Barclays. Your line is open.

Hi, thanks. Maybe one question on free cash flow. I mean, the cash flow numbers are obviously very impressive for the quarter, as well as the guidance for Q3. So, Gunnar, could you help us understand the working capital tailwinds and the sources of those? And as you look beyond this year, to what extent can you keep harvesting that cash flow? And as you get to next year, you obviously have the cash cost going down of integration, and then you have interest costs going down. but then you have offsets potentially in the form of advertising or programming costs going up and BTC getting back to growth. So could you talk about those trade-offs as you look beyond this year in terms of free cash flow growth drivers and what they could look like in 24? Thanks. Sure.

So let me start with the source, and I quickly went through them in my prepared remarks earlier. But again, the most important point is It's coming in across the entire cash flow statement. And we have talked about this in the past. Cash was never an objective in three quarters of this company. And so when we went in and looked at the enormous amount of uncollected receivables, the enormous delays in even sending out invoices, the willingness to just pay our suppliers before even payments are due, it was just never a focus area. The discussion of a 10% margin business or project, is that a good project? Could be, but it could be a bad project if it takes three or four years to get the cash in after you deploy the capital. So those are all factors that are reflective of a mindset shift across the company. And importantly, I do also want to point out, because we sometimes get the question on the securitization facility, we've said a number of times, We're not intending to make that a major driver of free cash flow. It hasn't been a factor this quarter or year to date. And again, we're not expecting this to be a major driver. It might fluctuate on a quarter by quarter basis, but it's not included in a positive or negative way in any of our guidance. And so looking beyond 2023 into the future, you're asking the question, how is this gonna develop from here? I do think that we have multiple lights at the apple ahead still from a working capital perspective. We're really just getting started and we're really still working with an incomplete instrumentation from a systems perspective. So there's a lot more for us to do. You've also gone through a number of the underlying positive drivers here. Cost to achieve is going to come down and I realize I forgot to answer your question. So we had guided to 1 to 1.5 billion in cost to achieve where to be uh you know as we said before probably closer to the upper end of it but 1.2 billion of that is going to flow through this year and then it's going to come down over time interest is is going to come uh is going to come down and um and capex is going to come down we have a slightly elevated capex level as part of our transformation uh focus here putting new systems in place supporting you know jb's development you know the max platform etc so that's going to be a a positive driver as well And then we'll see how we do on the P&L. Again, we've put ourselves in position to really get behind all three of our businesses, and we'll update you as we get closer to 2024. But there's definitely enormous opportunity, and I do not view this as sort of a one-time bump. We're changing the way we're operating the company, and we're changing the cash generation profile of this company. By the way, fully in line with what we've always said, longer term, We should be operating at a 60% cash conversion rate. Thank you.

Your next question comes from the line of Brett Feldman with Goldman Sachs. Your line is open.

Thanks for taking the question, and thanks for some of the help in terms of how to think about DTC segment EBITDA as we move ahead. I was hoping we could spend a little time talking about how we should be thinking about revenue in that segment. In particular, the key puts and takes around the net ad volumes as you sort of move past the U.S. launch and start to move into international markets. And I'd also be curious for your updated thoughts on the balance between driving growth through pricing and ARPU versus focusing on volume. Thanks.

Okay, well, let me start maybe and then pass to JB. As I laid out a minute ago, I do think that advertising for our D2C platform is a massive opportunity. I mean, you see that we're growing advertising 25% in the quarter on the platform, and that is in a challenging market environment. And in fairness, we haven't really started prioritizing this. And as I laid out, for the first time ever, advertisers are going to have access to some of the best shows in the entire landscape. And we're opening that up. We've got the technology in place, and it's definitely going to be a growth priority, especially since we know that in many cases we can generate higher ARPUs on the AdLight platform or offering than on the ad-free from ad-free subscribers.

Yeah, I mean, I think that, to add to Gunnar's comments, I think we look at it as multiple levers as we go into 2024. The ad, just picking up where Gunnar left off, the ad opportunity, we're just starting in the upfront. It was a huge driver of our success in the upfront. And so that will start to kick in further. We just started in February, as you know, with putting advertising units in our most highly valued, most premium content in terms of HBO. and some of the legacy HBO library series. And so that's, we see advertising as a driver. We see ARPU as a driver. We've risen, we've, you know, bumped prices up internationally and in the U.S. over the course of the last nine months in almost every market. We've launched the ultimate tier, which we've seen very healthy pickup here in the U.S., which is also incremental ARPU for us. And so that's an opportunity I think engagement, as David mentioned in his prepared remarks, we've seen very positive initial trends on greater engagement, which is a precursor and a leading indicator to future churn, which is obviously something that is probably number one in our bullseye of things we're trying to attack and lower, which will help us. And then obviously on the net ad side, as we roll out internationally and as we get the platform rolled out and as We lean to even more content offerings, as David alluded to, potentially in the live space. We think there's incremental opportunity to drive subscribers and, more importantly, revenue growth.

Thank you.

Your next question comes from the line of John Hudlick with UBS. Your line is open.

Great. Thanks, guys. You know, recent press reports suggest that ESPN is going to go direct in 2025. I think it's sort of the first time we have a potential sort of date for that. I mean, David, do you see that as a sort of meaningful change in the TV landscape? And then as it relates to your own sports portfolio, you talk about TNT in Europe. I mean, any update on the timing of adding sports and news to your streaming offering and whether it's the timing or the sort of method of what you do. I mean, do you foresee it just being folded in with the max offering, or could you potentially see a sort of a separate offering that could be bundled with the current max offering?

Thanks. Thanks, John. First, when it comes to our sports rights domestically and globally, you know, taken as a whole, we're money good. So we have good deals here in the U.S. and around the world. that provide real value to us. One of the elements of those deals is that we own the digital rights to our sports. So we have the ability for no incremental cost to put that content on our platforms. And we're doing it in Europe. We're doing it in different ways. In some cases, we're doing it as an incremental tier. And in some cases, we're putting it on the entire platform. And we've been at it now for about a year and a half or two years. And it's pretty compelling. You know, I've talked about news and sports as artillery and a real opportunity for us. So we'll be coming to you guys soon. We've been working this summer very hard. Number one, we wanted to get this platform right. We wanted to do no harm. Let's get a transition. There was a fair amount of overlap. And we got the transition. The platform is working exceptionally well. Consumers are very happy. Engagement is up. One of our theses of having, you know, how well this overall mix of content will work directionally is very, you know, it looks like it's working. More than 20% of the viewership is going to some of the more diverse content in different time periods. We still have a lot of work to do. We're early on. But news and sports are important. They're differentiators. They're compelling. And they make these platforms come alive. And that's, you know, if you're on an SVOD platform and something is going on in the world, and you could see it, it has that platform, makes that platform really alive. So you will hear from us on that soon.

Great. And the ESPN Direct, Sethi?

You know, I think how everybody determines we're focused on how we're going to use our sports domestically and globally to create more shareholder value and stronger economics and help the leagues who all are very interested in reaching more people, more demographics. And so that's our focus. And, you know, in addition, as you know, we have Bleacher, which is the the and House of Highlights, which are which is are a huge funnel for us. and a big opportunity. And we're focused on how we use that in tandem, because it is the largest platform for people under 30 in sport.

Okay, thank you.

Your next question comes from the line of Jessica Reif with Bank of America. Your line is open.

Thanks. Just on film, maybe just to go a little deeper. I mean, Barbie was so outstanding. So, you know, the lessons learned from having original IP and You know, like brilliant marketing. You know, how does this shape your film strategy going forward? Can you talk about the impact to Max when a hit film hits the platform? And then I guess also in kind of the studio segment, you talk about selling to third parties, which obviously makes a lot of sense. Have you seen any change in demand given the strikes? Or can you just talk about overall demand for your content?

Well, thanks, Jessica.

Barbie is really important for us because we think one of the big unlocks of value is running this as one company. So we started having each of the businesses we meet together every week and all the creatives we meet together every week. We first got behind House of the Dragon, and we had the dragons going across the bottom of all 30 channels and across the baseball field. field in the playoffs and having our analysts, we got them the content in advance and they talk about it. We then did The Last of Us, this idea of supersizing by using the fact that we reached 30 or 40% of America on a given night. And that each of our, all of our platforms globally can have an impact. And we saw it with The Last of Us. We then brought the entire company together on Hogwarts Legacy. and supersized it we don't we we're not doing it for everything we're trying to figure out what are the strategic assets and then we did it on max um and we're getting better at it we're just getting started you know this is such a diverse set of amazing assets that how do we use them to help each other and how do we use them also that that we don't have to go out and spend money when we already have huge marketing platforms that we could use on our own and Using some of, you know, having Barclay and Shaq talk about something that they already love is often more powerful than running a commercial. And so it's important for the confidence and the culture of the company that we can get behind these assets in a unique way. We're a very unusual company with the assets that we have. And it starts to build our muscle memory and the idea that this can work. You know, this idea of a Barbie summer. And then every week, what is everyone around the table going to do? And, you know, the cakes were pink on Food Network. We turned the fields pink across Europe. And, you know, of course, it started with an amazing movie by Greta and Margot going around the world. So it starts with great content, obviously. But the fact that we can supersize it uniquely, globally, is a big deal for us. We really believe in the motion picture window. Let this movie go to the motion picture window, play it up, build up that brand, then have it go into Peavod, take it through these windows of economics that have worked forever and we think work extremely well, and then put it on Max. And when it goes on Max, we think it'll have a very good impact and that'll be in the fall.

KB?

Yeah, I mean, Jessica, as you know, films, obviously, and movies continue to be a very important part of the Max offering. I should remind people that in the U.S., obviously, we're particularly more reliant on the Warner slate. Outside of the U.S., we are a multi-studio service still, including the Warner slate. But films are incredibly important. And I will say what we've seen so far is, you know, obviously, we sort of benefit on Max in both ways, even content, even the titles that don't necessarily perform as well as we want it to them in the box office by the time they get to max because fewer people have seen them and they are newer to more people, they do well. And the bigger titles like we had in Batman last year or Dune when it came to the service, and we expect the same of Barbie that do incredibly well, people want to re-see. And so it continues to be an incredibly important part of the business.

Look, the key for us is as we have accelerated the de-levering now and made the turn, that we focus on growth and focus on growth will be we now have command and control for each of each of our businesses. And we're going to give the same rigor and focus on on how do we drive growth across each of our businesses? And one of those key initiatives is one company. How do we how do we use this, the unique set of assets that we have that no one else has globally? to drive growth, and that's what we're continuing. We're starting much more to focus on growth, and you'll see it, and we'll be talking more about it. The content licensing, look, we have one of the best TV and motion picture libraries in the world. If you look at the overall economics, I think we're actually below the last couple of years in terms of what we're selling. If the strike continues, there may be more demand. We're always looking to maximize. We're hoping this strike gets settled as soon as possible. It's important. It's important that we get going, that we get back to work doing what we love, and we're hoping that both of these strikes get resolved soon. That's our focus.

Thank you. Your next question comes from the line of Ben Swinburne with Morgan Stanley. Your line is open.

Thanks. Good morning. David, you've been through lots and lots of cycles, advertising cycles in particular in your career, and I'm wondering how you would describe the current environment. Experienced. You know, I guess the question is, I think about your Jack Welch story from all these years talking about ratings going down and advertising going up and whether there's any concern in your mind that maybe linear TV has reached that point. And the corollary would be with Max, it would seem like you have a great opportunity to sort of move some of that linear money over to B2C. And I'm wondering if you're optimistic that you can kind of capture that one for one. So it's sort of a bigger picture advertising question, but we'd love to hear your thoughts.

Thanks, Ben. Look, the market is, it improved a little bit last quarter, and we think, you know, it feels like it's improving a little bit this quarter. We're seeing some more improvement, not anything great, but we're seeing some more meaningful improvement outside the U.S. But this is unusual. You know, in my, you know, 35 years, know i think a lot of us expected that there would be a meeting that we'd see a meaningful recovery in the second half of the year and we haven't seen it and you know we need to we've needed to figure out how to make up for that um you know we just came out of an upfront that is encouraging at least for us we're seeing mid-single increase on the sports side um we we got price increases on with some of our affinity networks Some of these networks are really important to advertisers, and we're still doing a lot of original content, which makes us unique. And some of our smaller networks were, you know, slightly down. Max was the star. I mean, a big star. As JB said, you know, some of this content, you know, the greatness of HBO and Max, the Casey, all that content that we have, 127 Emmy nominations, the idea that you can get in front of Succession. that you can get in front of the highest quality content for the first time. And it's very uncluttered. It's one spot right for now on the front end of it. And some of the older content is limited. And so we're seeing really good pricing. We can't say one for one. We need to build up max for now. There's a huge demand for it. We're going to be pushing for, as we look at growth everywhere, we're going to be pushing now for how we reduce churn and grow max. But it's very helpful to us that we have a significant digital footprint. We have a really strong product in max. And look, for us, we can't predict what's going to go on with the linear business. But we have a lot of command and control, as I talked about earlier. And the viewership on our platforms are actually quite strong. It's just that they're older. And there's a load of people still loving and watching our content. And most of our content now is going over to Max. So they're watching Diners and Dives. And then we're monetizing it again to all of our subscribers on our ad tier and around the world. So we have that symmetry. We need to build up the other side, but we've been very aggressive and we will continue to be about driving the margin and we're aware that there's a decline in the traditional business and we're fighting to keep that free cash flow and we'll pull every lever we can.

Thank you, David.

Your next question comes from the line of Michael Morris with Guggenheim. Your line is open.

thank you guys excuse me good morning um i want to ask one about the strikes and one about the international business first on the strikes david um you know from the outside it does feel like the two sides uh are very far apart and so i i'd love to hear if you could characterize you know how far apart you feel that the sides are you know recognizing that that you're being negotiated on behalf of but um your interests are obviously very much at stake here so i'd love to hear Just sort of your thoughts on how far apart the sides are and how influential you feel like you can be on bringing sides together. And then second, on the international business, you made constructive comments about the opportunity there. Obviously, your international business has a pretty big mix of brands and partnerships, licensing arrangements. So can you maybe talk about the strategic vision here? Is your ambition to have one strong single brand over time, similar to the way Netflix is structured, and maybe more tactically, what are some of the milestones or initiatives over the next 12 months that you're looking to achieve? Thanks, guys.

Thanks so much. Well, look, on the strike, I'm very focused on it because this is our business. This is all we do. And it's critically important that the Everybody, the writers, the directors, the actors, the producers, all the below the line crews, you know, and everyone needs to be fairly compensated and they need to feel valued and feel that they're fairly compensated in order to do their best work and that we have to focus on getting that done. You know, I'm hopeful that it's going to happen soon. I'm going to, you know, I think all of us in this business are very keen to figure out a solution. as quickly as possible. We are in some uncharted waters in terms of the world as it is today and measuring it all. And so I think in good faith, we all got to fight to get this resolved. And it needs to be resolved in a way that the creative community feels fairly compensated and fully valued.

And then, Michael, as it relates to international, certainly on the streaming side, we will be moving to one unified, consistent brand with a launch of Max over the next 12 months with a rollout plan for LATAM, EMEA, and then APAC. So absolutely, over the course of sort of the next 12 months, that's the roadmap and the plan we're on. I think the second piece is we're obviously excited as we think about content mix. particularly in an environment where, to David's point about the strike, we do have great original productions happening outside the U.S. as well, both for Max as a platform as well as our local networks, and that content will feed Max as well. And so this mix of powerful global IP and global content coming largely out of the U.S. as well as local content produced by our local teams in market, particularly in Europe and LATAM, That mix to drive penetration of MAX outside the US we think is very powerful. And then on top of that, we have, obviously, as David alluded to earlier, our sports. And as we think about Europe, in particular, with the Olympics incoming home to Europe next summer, will be a great launch platform for us in EMEA.

Next question.

Your final question comes from the line of Phil Cusick with J.P. Morgan. Your line is open.

Hi, guys. Thanks for squeezing me in. Congrats on Barbie. I'm excited for Shaq and Charles to discuss a Barbie Superman team-up. That'll be great. You know, following up, two things. Following up on John's question, it sounds like NHL is coming to Max, and we should think about Max as the path for more of your Turner sports over time approach. How does that impact max pricing? Can you put those sports on and keep prices around this level, or do you think we need a substantial increase to get there? And then second, on lower DTC churn in the quarter, was that driven by, I think you mentioned, what's the remaining discovery HBO overlap, that sort of latent churn, and what do you see in the pace of that consolidation going forward? Thank you.

We think it's a real asset. All the sports rights that we have, we have a real strategic plan that we're finalizing, and we'll take it to you guys and be very clear about exactly how we're going to use news and sports on our platforms and to build value for the future in the near term.

Yeah, I mean, I think as David alluded to earlier, in sports, we have a mix of models today across. Largely in Europe, it is priced in an incrementally priced tier. In LATAM, we have some sports bundled, a mix there as well. We have some local football or soccer in a separately priced tier. We have Champions League in Mexico and Brazil priced within the entertainment offering. I think generally our view is sports is a – such a premium offering with a very focused and passionate fan base, that generally the model will require some way to find, need to find incremental value to get out of it. And so exactly how that comes to market, we will have more to say later in the year. But generally our view is that it needs to be monetized incrementally. Let's put it that way. um and then as it relates to the uh overlap i think as we said publicly before uh we had about four we estimated about four million global overlapping subscribers between d plus and hbo max at the time uh with a uh you know a large portion of that in the us um in gunnar's remarks he talked to the fact that we've now uh seen several hundred thousands come out of that uh in the us um and you know We will continue, presumably, to see some further tailing off of that overlapping sub-base, but it has been materially less than we expected. And so that's the story on the overlap.

Can I follow up quickly on the MAC side? Do you think that CNN would also require incremental value, or do you think that could be integrated on the regular product?

We're going to talk about news and sports. We'll be back to you soon on that. You know, one of the things you're also seeing with us is we're winding out a very there's there were some low ARPU deals that were internationally that we just looked at and we just said, that's not who we are. Let's get out of those deals. And so there has been a focus to say, let's focus on profitability. Let's focus on really good subs, real value deals. The economics that we get, the ability to nourish our audience and build on those economics, that's our future. And let's get out of these deals that were bargain basement and providing very little or poor value. Makes sense. Thanks, David.

This concludes the question and answer session, as well as today's conference call. Thank you all for joining. You may now disconnect your lines.