Warner Bros. Discovery, Inc.

Ladies and gentlemen, welcome to the Warner Brothers Discovery third quarter 2024 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 Slavin, Executive Vice President, Global Investor Strategy. Sir, you may now begin.

Good morning, and thank you for joining us for Warner Brothers Discovery's Q3 Earnings Call. Joining me today is David Zaslav, President and Chief Executive Officer, Gunnar Wiedenfels, Chief Financial Officer, and J.B. Perret, CEO and President, Global Streaming and Gains. Today's presentation will include forward-looking statements that we made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may include comments regarding the company's future business plans prospects, and financial performance and involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on factors that could 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. In addition, we will discuss non-GAAP financial measures on this call. Reconciliations of these non-GAAP financial measures to the closest GAAP financial measure can be found in our earnings release and in our trending schedules, which can be found in the investor relations section of our website. And with that, I'd like to turn the call over to David.

Good morning, everyone, and thank you for joining us. I want to start my remarks by providing a broad overview of where Warner Brothers Discovery is on our journey today and how we are moving the company forward with an ultimate focus on creating value for our shareholders. It is well known that our environment is being reshaped by generational disruption, which is creating both challenges and opportunities. Where we are confronting challenges, we are addressing them directly. And where we see opportunities, we are seizing them with discipline and determination. Right now, there are several important dynamics playing out in our business. First, we believe that many of the assets that comprise our business are currently undervalued, and we are working to both demonstrate their fundamental strength and enhance their value. Part of that effort has involved acting aggressively to reduce our expense base and lift our free cash flow conversion. To date, we have paid down more than $16 billion in debt with our strongest cash generation quarter of this year still ahead. Our team is highly focused on identifying and advancing a range of initiatives that aim to enhance the value of our company. As these initiatives mature, I am confident our shareholders will both see and feel significant upside. Second, we are making strong progress in executing our strategy and creating what's next for Warner Brothers Discovery. Over the last two and a half years, we have invested meaningfully in new technologies and platforms, partnerships, and creative talent, and driven changes in our structure to accelerate growth. Today, those investments are delivering clear bottom line results in our direct-to-consumer segment. We are making substantial progress at Max, where, as I will describe in more detail shortly, strong subscriber growth is driving increased revenue and profitability. And while we are encouraged by our progress, we have more work to do to deliver the kind of results we and you expect. But to be clear, I can assure you we are doing the work necessary to evaluate all steps operationally and strategically to improve performance and unlock shareholder value. As I have conveyed to our employees, there are three prongs of ATT&CK to deliver expected shareholder gains. First, deploying MAX globally as a distribution and storytelling platform, enabling it to achieve its full potential in both reach and profit. Second, optimizing our networks business, including our U.S. linear television business. And third, returning our studios to industry leadership. I will briefly address our performance and outlook in each of these areas, and Gunnar will then share more financial detail by segment. First, it has been a very important and successful quarter in Max's development and deployment. Anyone who has listened to one of our earnings calls over the last two years knows Max's importance to Warner Brothers Discovery. We possess and produce tremendous content, film, TV, news and sports. Building a leading, fully global direct to consumer platform to make that content available has been a clear strategic initiative. Getting Max right has required patience, discipline and substantial investment. Today, those investments are delivering clear results. both in terms of subscriber-related revenue growth and bottom line impact. At the beginning of the year, Max had only launched in the US. Nine months later, Max was available in 65 markets. We have added 13 million subscribers, thanks in part to 7.2 million additional subscribers in the third quarter alone, and now have more than 110 million subscribers globally. Equally encouraging, we're beginning to see real acceleration in subscriber-related revenue growth and significant profitability growth. Overall, our direct-to-consumer revenue of 2.6 billion is up 9% year-over-year, and EBITDA of 290 million is up more than 175% year-over-year. And in the fourth quarter, we will enjoy another quarter of strong revenue, profit, and subscriber growth. What's driving this success? First, of course, we have great content. While technological advancements have placed emphasis and attention on distribution, the history of entertainment shows great content always wins. We are also improving the cadence with which we put the content people most want to see in front of them. Beginning this past June with season two of House of the Dragon and continuing now with The Penguin, and extending forward with titles like Dune Prophecy, White Lotus, The Last of Us, and Peacemaker, just to name a few. Max is delivering tentpole shows, new originals, and feature films on an even more consistent basis. Internationally, our success is being driven by delivering that beloved content as well as new originals with local sports in most international markets and 15 plus years of local language content, all on our streaming platform throughout Europe and Latin America in a way that few others can rival. The critical role Max played in being the home of the Olympics in many markets across Europe in Q3 is just one example. Even without the Olympics, we expect our momentum in driving Max subscriber growth to continue going forward. Later this month, Max will launch in seven markets across Southeast Asia, And next year, Max will launch in Australia and over a dozen other markets, with more to come, including three of the biggest markets in Europe in 2026. Long term, we believe our content will continue to provide us a meaningful competitive advantage, and we are only scratching the surface of what we can achieve through added scale. Based on everything we are seeing, we are highly confident we are on track to meaningfully exceed our target of $1 billion in EBITDA in 2025. Next, I want to talk about our networks business. While the challenges and headwinds we face in our U.S. linear television business are well known, this is still an extraordinarily important part of our business. Linear TV is a core vehicle to deliver WBD storytelling to hundreds of millions of fans worldwide, and the significant profits it generates helps fund building the investments that will carry Warner Brothers Discovery into the future. The best evidence of the important role our linear business continues to play for Warner Brothers Discovery is in the renewal agreement we struck with Charter Communications in September. This agreement was a victory for both companies and represents an innovative way to best serve customers as our industry continues to transform. In extending Charter's carriage of our linear networks, while also giving their subscribers ad-light access to Macs, our company struck a deal that's mutually beneficial, where the consumer wins most of all. In their Q3 earnings communications, Charter discussed plans to lean more aggressively into its video product, which they attributed to providing enhanced value to their customers with increased access to streaming services like Macs. We are optimistic this is a sign that these types of agreements will create more stability in our industry. Lastly, I want to address the work that obviously needs to be done to return our studios business to industry leadership. There have been some real bright spots in our studios business. Our TV studio is on track to have its most profitable year in scripted content in the last five years. It's currently making over 80 live action scripted, unscripted, and animated series for nearly 20 platforms, including all the major U.S. broadcast networks and key U.S. SVOD platforms. And on the motion picture side, our third quarter saw strong success with Beetlejuice Beetlejuice. But even in an industry of hits and misses, we must acknowledge that our studio's business must deliver more consistency. This applies to our games business, which we recognize is substantially underperforming its potential right now. We have four strong and profitable game franchises with loyal global fans. Hogwarts Legacy, Mortal Kombat, Game of Thrones, and DC, in particular Batman. We are focusing our development efforts on those core franchises with proven studios to improve our success ratio. Inconsistency also remains an issue at our motion picture studio, as reinforced recently by the disappointing results of Joker 2. For the past two years, we've been driving changes within our motion picture studio to improve green light governance and franchise management, which remain focal points going forward. This is a business where translating operational changes into results takes time. but I believe we'll see those strategic shifts deliver improved outcomes in the coming years. Overall, we anticipate improved profit results for our studios in Q4, thanks to what we expect will be another successful quarter for Warner Brothers TV. Gunnar will take you through some decisions we made in content licensing that have negatively impacted this year's financial results, but we believe will lead to significant growth opportunities in the future. And over the next several years, we expect our games and motion picture businesses to deliver more consistency, resume industry-leading performance, and contribute substantially to Warner Brothers Discovery's business success. Before I turn it to Gunnar to provide more detail on our financial results, I want to offer a final thought on the power of what we are building. By leveraging our storytelling abilities with our abundance of beloved content, and utilizing our distribution platforms, we can deliver real differentiation that leads to growth. Look no further than the Penguin. The Penguin, which spotlights a well-known DC comic character building on the success of the Batman, was envisioned by HBO with creative talents like Matt Reeves, Lauren LaFranc, and Colin Farrell, produced by Warner Brothers Television. distributed on HBO and Max to viewers all over the world, promoted across the Warner Brothers Discovery landscape, critically acclaimed, commercially successful. Stories like The Penguin that can shape culture, spark conversations, and become appointment viewing always win over time. When you look at our unique ability to create great content, distribute great content, and market great content, it reinforces why we are so well positioned to stand apart from the pack over the long term. So I will conclude by saying two things are true. Our industry is experiencing generational disruption, presenting us with both challenges and opportunities. At the same time, our strategy is succeeding in important ways. When this period of extraordinary disruption settles, based on the momentum we are seeing in our direct-to-consumer segment, the work we've done to sustain our linear TV business, and what we're doing to return our studios to peak performance, I remain confident that Warner Bros. Discovery will be one of the companies leading the global media industry into the future.