Warner Bros. Discovery Inc (WBD) — Q2 2020 Earnings Call Transcript

Good morning, everyone. Thank you for joining us for Discovery's Q2 earnings call. Joining me today are David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. You should have received our earnings release, but if not, feel free to access it on our website at www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we will open the call to take questions. Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events and they 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 31, 2019, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I would like to turn the call over to David.

Good morning, everyone, and welcome to our Q2 earnings conference call. Last quarter we noted that these uncertain times highlight unique competitive advantages that distinguish us from many of our peers, strategically, creatively, operationally, and financially. We benefit from content leadership in core genres that are relevant, popular, and durable, an efficient, low cost content production model with a long tail and global appeal, short production cycles that allow for quick content development, the most international and diverse mix of assets, platforms and brands, and among the most trusted family-friendly brand portfolio that offers safe environments for advertisers. And while our relentless focus on content that nourishes and delights our fans has always been our North Star, its impact couldn't be more significant than it is right now. In a world that offers viewers greater choice than ever before across an increasing array of delivery platforms, an added competition per viewer's time, more and more viewers are choosing to spend time with us everywhere around the globe. It's emblematic of our differentiated model. At a time when most broadcasters and networks have been relying on repeated reruns of scripted shows, we brought over 1,000 hours of fresh, original content to our networks since the world's shut down due to COVID. It's been cost-effective, creatively shot and produced, and well received. In fact, 'Amy Schumer Learns to Cook,' which was shot from home for Food Network, was nominated for a Primetime Emmy. Most importantly, our ability to continuously refresh and update our intellectual property further adds to the strategic value of our global IP library. Particularly as we drive our content increasingly direct-to-consumer and its attraction increases to others during a time when nearly all platforms require more and more depth of content to attract, delight and maintain subscribers. Our content is differentiated in the marketplace and is a great consumer complement to others. The appeal of our intellectual property continues to increase. In the United States this last quarter, even though we do not own a broadcast network, we were the number two portfolio on all of linear TV in total day among our target demographics. And we grew our number one share of pay TV. While internationally, building off Q1 success, we grew a record high share another 4%, despite not having any sports and helped by tailwinds from our global brands, as well as the impact of our local content offerings. The impressive ratings and share narrative couldn't be happening at a more critical time, particularly as we put finishing touches on bringing an aggregated direct-to-consumer product to the market here in the United States and enhancements to our subscription video on demand offerings like Dplay in many markets around the globe. The details for which we look forward to sharing in the very near future. We believe there exists a great opportunity to reach the growing quadrant of viewers who either don't have access to our brands and content or want to consume content out of the traditional video ecosystem. Informed by the growing engagement of authenticated and unauthenticated viewers to our GO platform here in the U.S., we remain excited to hit the ground running. Underpinning all of our efforts is a financial model that is super solid. We generated a Q2 record of nearly $900 million of free cash flow. While some of the growth was driven by timing factors, the performance is emblematic of the efficiency of our model and the resiliency of our cash production. We remain a free cash flow machine. Having ended the quarter with $1.7 billion in cash on our balance sheet, minimum debt due over the next three years and an undrawn $2.5 billion revolver, we are pleased to now resume our equity buybacks at what we believe represent very attractive levels. We are pleased to be able to bring long-term value to our shareholders by investing in our future growth prospects, as well as returning capital to shareholders, even in the current environment. We've recently completed important renewals with four major distributors in the first half of 2020: Cox, Charter, Comcast, and Sky. And we are pleased with both the value we are receiving and delivering within the traditional distribution ecosystem. We view these renewals as mutually beneficial and help us in our efforts to further develop our next-generation direct-to-consumer offerings, drawing upon the stability of our distribution profile in linear and increased flexibility for next-gen products. Turning to the advertising marketplace, from a high level regarding COVID, it feels like the advertising markets have largely bottomed and the worst is behind us. Though I would caution that visibility still remains relatively limited. April was a low in the U.S., with a nice recovery in May and June. While internationally, with some regions like LATAM still searching for a bottom, we have seen a noticeable return of advertising spending against the TV marketplace, where economies have increasingly begun to open, particularly in Europe. In fact, a number of markets in EMEA, such as Poland and Germany, two of our largest and most important advertising markets, are experiencing a much faster recovery than we thought against our internal projections. As I noted, we continue to grow share internationally, both for the entirety of our international marketplaces, as well as the top ten advertising markets, each up 4%. We saw particularly strong growth from our locally focused free-to-air channels, notably in Italy with Jio and in the UK with Really and Quest, as well as continued momentum at HG, Food, TLC, Discovery, and DMAX. Our efforts from day one post the Scripps merger to further drive their lifestyle brands around the globe has also proven to be an important element of our share story. This quarter, HG and Food became our number three and number four global brands by audience, up 160% and 50% respectively in the quarter, helped in part by continued new channel launches. From a ratings perspective here in the U.S., we were led by TLC, which is the number one network across all of TV on Sunday nights and solidified its position as the number one pay TV network across all of prime time among our target female demographics. In fact, TLC delivered the biggest primetime gains this quarter for any non-news network among the top 25 pay TV networks. The network is on fire and Howard Lee and his team continue to innovate with content that resonates with audiences around the globe. Overall in Q2, we owned four top 10 pay TV channels in prime time in P2+ and total viewers: TLC, HG, Discovery, and Food, which means that when people weren't watching the news, viewers chose to spend time with us. Turning to the upfront, while without a doubt, this is an unusual upfront market. No one has as much momentum as we do. We have fresh content ratings, tailwind, the hottest network for women with TLC and an exciting, clearly anticipated new network soon to launch with the Magnolia Network. All underpinned across verticals that uniquely resonate with advertisers. Collectively, we offer advertisers an even greater reach than our broadcast peers, particularly in the coveted 24 to 54 demo, having out-delivered each of our broadcast competitors on C3, 95% of the nights in Q2. It's quite an accomplishment for Discovery's networks in the aggregate to provide more reach 95% of the time than our broadcast peers. In addition, we have longer length of view and time spent on our networks. As such, given the glaring discrepancy in CPM pricing, while we have broader reach and delivery, we continue to lean in to package our content to drive greater share of wallet spend in the upfront and in scatter. Market challenges notwithstanding this year, I feel our hand has never been stronger than it is right now, given the full arsenal and complement of our networks that we have to offer and how well we align with advertisers and brands, particularly when eyeballs are scarce. Thus, whether in the upfront or in scatter, we work closely with our advertising partners, as we always have to offer real differentiated value, fresh value in the marketplace. Building on niche strength, and as I noted, we couldn't be more excited about our plans for the Magnolia network, which is coming into focus. Chip and Jo are hard at work on 36 originals, 14 of which are already in production. I truly couldn't be more thrilled that just yesterday, we announced that Fixer Upper is coming back to the delight of so many viewers and advertisers, and all the new episodes will be exclusive to our network. We hope to pick up right where we left off during the final season, and an astounding 75 million people tuned in, including 20 million people on an average weekly basis. As for distribution, we naturally won't be immune from subscriber churn, particularly in cases where it's driven by economic pressures. Though we remain well-represented, maybe the best representation of anyone across the virtual MVPD landscape in the U.S., where there continue to be pockets of strength, such as from Philo offering a more affordable and entertainment-only true skinny bundle. In fact, Philo has had great momentum topping 700,000 subscribers, double where they ended 2019. Our recent renewals have provided us with a healthy pricing backdrop to help mitigate the revenue impact from subscriber churn. Outside of the traditional bundle, we continued to enhance our portfolio of global AVOD and SVOD content and lifestyle platforms. Lastly, while there were still a number of COVID-related uncertainties that we are addressing head-on, I remain enthusiastic about the strategic course we are on behind an increasingly relevant global portfolio of assets and passion verticals and the addressable market opportunities that we see unfolding for our next-gen products. Moreover, the financial backdrop that underpins our ability to navigate and invest against these remains on solid footing. I'd like to once again thank our hardworking employees for their dedication and resiliency during this most uncertain time to deliver an outstanding product on a global scale. Now I'd like to turn the call over to Gunnar.

Thank you, David. Good morning, everyone. As David noted, we continue to operate under less than optimal conditions around the globe. However, I remain very pleased with how our organization has adapted and evolved in the face of current uncertainty and limited visibility. The benefits of a dual revenue stream model are apparent, particularly long-term contractual subscriber-based distribution revenues, which I'm pleased to report we continue to renew with solid pricing and mutually beneficial terms with our partners. This highlights not only the tremendous value of our content on the linear platform but also supports the evolving nature of how we may reach audiences on a B2C basis. I'm looking forward to discussing our plans with you in greater detail in the near future. Even as we continue to invest to support these initiatives, the efficiency of our operating model has never been more critical or more apparent. While there were some timing-related benefits, most importantly from a decreased content spend, particularly on delayed sports events, we achieved our highest free cash flow in the first half here in the company's history. Consequently, over the trailing 12 months period, we have again generated $3.1 billion in free cash flow in an environment when global ad sales were down 11% excluding foreign exchange in the first half and down 20% excluding foreign exchange in the second quarter. I'll provide some modeling help on the cadence of our free cash flow drivers and content spend specifically shortly. In the U.S., advertising decreased 14% year-over-year in an environment characterized by overall weaker demand stemming from COVID-related issues. Though while demand was weaker, we were able to hold firm on pricing and our overall cost per thousand impressions for the quarter were up mid-single digits year-over-year. Scatter pricing was solid, up 25% above last year's broadcast upfront. Interestingly, much of the movement of dollars initially out of the upfront commitments and then later bought back into scatter ultimately returned at a higher pricing. Also, in a number of cases, we extended the content length of our shows. We were pleased that primetime delivery across the portfolio was flat year-over-year in our target demographic during the second quarter, versus the rest of pay-TV down in the mid-teens. As expected, April was the toughest month in the quarter, and that present appears to have been the trough with both May and June on average much stronger week-to-week and even month-to-month. While the trend line is still slightly irregular, it is indeed pointing in the right direction. To that point, and bearing in mind that we haven't closed the books on the month, our latest estimate is that July will be down in the low teens year-over-year, a sequential improvement over the second quarter. That said, with the return of major league sports in the U.S., we may see some shift of advertising dollars away from our verticals. Additionally, we continue to remain cautiously optimistic and mindful of the pace of recovery in the U.S. given the resurgence of the pandemic in parts of the country in recent weeks. Distribution revenues increased 7% year-over-year, including a 500 basis points benefit from a non-recurring item. The underlying year-over-year growth rate was 2%. Performance was impacted by a 5% decline to our fully distributed networks and a 7% decline to the total portfolio; a slight acceleration versus the first quarter, which we had expected as we lapped the YouTube deal during the quarter in April. We continue to foresee subscriber declines for our wholly distributed networks to be more or less in line with industry trends. Now turning to international, and note the following commentary is provided on a constant currency basis. International advertising decreased 37% year-over-year, given COVID-related demand weakness around the globe. Across the three main international territories, Asia-Pac, our smallest region, began to stabilize towards the end of Q1. EMEA, the largest, appears to have bottomed and stabilized during Q2, while LATAM unfortunately may not have bottomed yet. Again, while the level of visibility is still reasonably opaque, we are increasingly encouraged by the pace of recovery in a number of key territories, particularly in EMEA, in countries where COVID has been reported to be better under control and steps taken to further open up. We have seen a sequential resumption in the pace of TV advertising. While we still don't know to what extent sports will resume in the second half of the year. Based on our latest estimate, DNI advertising in July is estimated to be down high teens year-over-year, with Europe slightly better than that while LATAM is down significantly more. Overall like in the U.S., this points to further sequential improvement in July versus the end of the second quarter. Distribution revenues decreased 2% year-over-year, in part impacted by little to no sports programming in the quarter across our various platforms. Eurosport player, GOLFTV and certain premium Dplay tiers, as well as the previously noted impact from our more aggressive stance to drive direct-to-consumer distribution in countries such as Denmark. Worth noting is that we recently exited our agreement with the German Football League for the fourth and final year of the Bundesliga; while beneficial to AOIBDA, had we not, distribution revenue would have been meaningfully higher this quarter; this comparison will exist for the next three quarters. Now turning to costs. Total operating expenses were down 10% year-over-year excluding foreign exchange in the second quarter, resulting in AOIBDA margins that were relatively flat. Total cost of revenues declined 12% excluding foreign exchange in part due to the timing of sports costs. We recognized very little sports rights costs during the quarter—approximately 35% of what we recognized last year—as a result of the shutdowns. Many of the events have been deferred to the second half of the year rather than being canceled. As such, we will be recognizing those expenses as sports resume in what admittedly looks to be a rather condensed schedule in Q3 and Q4. Outside of sports, we realize modest savings across traditional content spend while continuing to invest in content and rights geared towards our next-generation initiatives. Overall, Selling, General and Administrative expenses decreased 8% excluding foreign exchange, largely helped by lower marketing spend. As we continue to lean in on our next-generation initiatives, we expect marketing spend will begin to increase both to build awareness and for continued performance marketing. Travel and Entertainment was also minimal during the quarter as the vast majority of our employees continue to work from home and travel was virtually stopped. As we continue our office openings around the globe and employees returned to more of a business-as-usual cadence, inclusive of travel, incremental spend should be expected, though it is reasonable to envision this returns rather slowly. We continue to take the necessary steps to align our overall cost structure with the changes that are taking place within the TV ecosystem. The evolution of the transformation we began in 2018, following our merger with Scripps, though as we continue to refine and broaden our next-gen strategy, savings from our continuing focus on operational efficiencies will primarily be redeployed towards these initiatives. I continue to expect total full-year operating expenses to be flat year-over-year on a constant currency basis, slightly lower in the first half, slightly higher in the second half given the more condensed sports schedule and content investments that I’ve previously laid out. Keep in mind for modeling purposes, that to the extent sports do resume in full, we expect to compress nearly an entire calendar year into two quarters at a time when the advertising market, though improving in Europe, is still in recovery mode. We continue to expect that core business operating expenses will be down mid- to high-single digits year-over-year, offsetting the increased spend for growth initiatives. A couple of comments on below-the-line items for the second quarter: first, our effective tax rate for the quarter was 34% primarily due to withholding taxes outside of the U.S. that are calculated for the year and spread evenly across quarters. We expect that the book tax rate will finish the year in the low- to mid-20% range. Second, additionally, in conjunction with the debt that we tendered during the quarter, we recognized a $71 million, or $0.08 per share net of tax debt extinguishment charge. Adjusted earnings per share for the quarter was $0.77 after adding back purchase price amortization. Excluding the aforementioned debt extinguishment charge, adjusted earnings per share would have been $0.85 in the second quarter versus $1 per share last year on a like-for-like basis. Foreign exchange was approximately a $14 million drag to revenues and a $15 million to AOIBDA in the second quarter. For the year, based on current rates, we expect foreign exchange to have a negative $35 million to $45 million impact on revenues and a negative $25 million to $30 million impact on AOIBDA. Turning to capital allocation. As you may have noticed in our earnings release this morning, we are pleased to announce the resumption of our capital returns to shareholders via our share repurchases, where $1.8 billion remains outstanding on our authorization. As of the end of the second quarter, as David mentioned we had $1.7 billion of cash on hand. As a matter of fact, as of the end of July, one month into the quarter, that balance has grown to over $2 billion, plus, of course, $2.5 billion of undrawn revolver commitment and very little debt maturing over the next three years following our successful refinancing measures early in the year. As always, we will be tactical and flexible regarding any repurchases. However, a sensible construct to consider as you think about the cadence of our activity would center around us allocating roughly 50% of our free cash flow to share repurchases for the time being. That said, our overall capital allocation priorities have not changed, which having properly leveraged the company as reflected by our commitment to investment-grade ratings and our 3 times to 3.5 times target net leverage range, are to number one, invest in and support our core business to drive future growth; number two, evaluate inorganic growth opportunities, such as strategic mergers and acquisitions if presented with attractive opportunities and where it makes sense; and number three, return residual capital to shareholders. Now with that, I'd like to turn it back to the operator for questions.

Thanks. So I'd love to talk about the medium-term outlook for U.S. affiliate revenue growth in light of some of the accelerating subscriber declines. You've had a pretty good kind of industry-leading affiliate growth rate. So I was wondering if you could just give sort of the longer-term outlook about how you're thinking about your ability to keep getting price on linear deals versus those subscriber declines. And then relatedly, a big part of the country now is not subscribing to the linear bundle, so how are you thinking about taking that content kind of more direct to consumer? Thanks.

Thanks, Steve. Well, we just did, as we said, four big deals, three of them here in the U.S. The good news for us is our content is hugely over-performing. The not so good news for us is that our content is cheap, and so we've been able to get increases. I believe that we should be getting significantly more for our channels. We have the Number 1 channel in America and TLC where we're Number 2 or 3 in America for women. Aside from the news networks, you look at Food, HG, OWN, TLC, ID, our portfolio is extraordinarily strong and growing with characters and brands that people love, and they watch these channels like they watch Fox News all day. We're taking that into the upfront but as we sat down with distributors, they recognize that we're providing huge value. They make a lot of money by selling them. So I expect we'll continue to do quite well in renewals that come in the future, but right now we're very stable and we're very happy about that. So we can get on with getting on. To your second point, which I think is an important one is that there are 30 million subscribers or more, maybe 33 million, that are broadband-only. There are a lot of people that want to watch content with no commercials. There are some strong players out there that have built a great road to this direct-to-consumer business. We think we can get on that road, Netflix and Amazon and Disney Plus, it was hard work building behaviorally that road of getting people to pay for content and gestationally we're now like in the third or fourth inning, and people are comfortable with that. But those services are all scripted series and scripted movies. Effectively, they've built a road and they all have great sports cars; fantastic and they're beautiful scripted series and scripted movies. We have a new SUV that will be coming to you very soon with more detail and exactly how we're going to roll it out. But our SUV is filled with large fresh content, a huge amount of original content, and it comes at a time when people have been, because of quarantine, consuming and consuming Netflix and Disney Plus and Amazon, and hey, what's on these different AVOD and SVOD services. They've been picking at them and picking at them and picking at them. We think we will launch with a differentiated service, this new SUV, which people will find unlike a lot of these other products; it's useful every day, all the time. It'll be dependable all the time, and your friends and all the characters that you love, which really differentiates us fit into this new product, this SUV. There's plenty of room for everyone; all the characters that you love, your favorite brands, it'll be a great value, and the most important thing is it's going to be a terrific companion. We think we got a great lane, it's almost like that lane is ours. If you have Netflix, if you have Disney Plus, if you have Amazon, if you have any video product, who wouldn't want what we have? It's what most women in America are watching all the time. Then add to that Discovery, the BBC and all the Planet Earth content, all the environmental and Animal Planet content. So you have the most compelling, high-quality content for women and men that people can watch any time. In the background, their favorite characters, their favorite brands, together with the definitive collection, the world book effectively in the science, natural history, and environment area. When you put those two together, we’re pretty great alone, and we're pretty great with everyone else.

Sorry. Sounds good. Can't wait to take the SUV offer.

Yes. Let me just add one thing, Gunnar here on the affiliate question. Steve, so, a couple of points I want to make. Number one, as you know, we have a very clean affiliate number, and this is why we point out when there is a sort of special effects like in this quarter. The underlying number is 2%, if you combine that with the 5% subscriber decline sort of across the industry, essentially in our main part of the portfolio, then you get to sort of the implied pricing number. As David said, we’re pretty happy about how those deals have gone. No visible trend change here when it comes to pricing. The big factor that we don't control, of course, is subscriber declines. So we'll see how that turns out over time. There is going to be an increasing contribution, both in international and the U.S. from direct-to-consumer subscription revenues. Again, that's a little more difficult to plan out, but you should start assuming some positive contributions over time.

One more point, Steven, because the focus generally here in the U.S. tends to be the U.S. but we are the Number 1 global media company outside the U.S., leader in sports, leader in our aggregate local content that we have in every language. I just laid out what our strategy is here in the U.S. and we'll be talking to you exactly about when we're coming to market? How we're doing it? Exactly what it looks like, which is very exciting. But outside the U.S. we have a very compelling differentiated strategy as well. Local content, local sports. Netflix and Disney, fantastic services, they're coming over the top, primarily from the U.S. Eventually, Netflix has a little bit of local, Disney will have some local, others will do a little bit of local, but we’re local content, local sports. We think that differentiated above the globe attack. Outside the U.S., local language, local sport, very strong, very differentiated. In the U.S., very differentiated, a great companion, great content, great brands, great characters, great original. We like our hand.

Great. Thank you.

Hi, good morning. This is Meghan Durkin standing in for Doug. I want to see if you could talk a little bit about the progress with the Food Network Kitchen? Any update on subscribers post the Amazon promotion. How much is it contributing to advertising? Is there any e-commerce revenue coming in and any learnings there? And I have a follow-up for Gunnar.

Great. Thanks. Well, look, everything that we've done, we've been in the direct-to-consumer business for the last couple of years with the Eurosport player, Dplay, with Food Network Kitchen and each one of them we've learned, we fallen down, we picked ourselves up? What do people like? What do they want more of? How do we create a product that people love month to reduce churn? How do we get partners to help us? Partners to help us are hugely important. Being – having Amazon together with us, built into Echo, there’s a huge number of people that are on Fire TV, that Amazon is pointing to and driving. How do we get those people to convert to be Food Network Kitchen subs? What does Amazon do? What do we do? How effective can Amazon be as a partner in driving free funnel subs and pay subs, all of that is stuff that we're learning? It's going well, we're learning a ton from it. We get to talk directly to customers. As we roll out our big aggregate attack, it will take you through in the near term. At that point, we'll figure out what other details on some of our vertical products will give you.

And then I have a follow-up for Gunnar. So you can just give us a little bit more color on exactly where we're going to see the investments flow through the model. Is it going to be U.S., International, or a combination of both?

Yes. It's going to continue to be a combination of both. I mean, as David said, we're increasingly looking at the U.S. market. So if you look at last year, the majority was hitting international. You should assume that that's going to be a bit more balanced mix this year. Other than that, we had given guidance initially as we went into the year on our investment levels. I know we have retracted guidance, but we have continued to invest, and I continue to expect us to keep investing at pretty much a similar level as what we originally got into this: roughly $600 million of losses from those new investment activities for the year.

Okay. Thanks guys.

Thank you. Three, four questions. Can you talk about what you're seeing on pay-TV subscribers outside the U.S.? Disney called that out on their earnings call yesterday? Second, on cost you've had amazing cost control, I know Gunnar you said it's flat on a full-year basis, but when you look forward, can you parse out how much of these of the cost containment or decreases and how much is permanent and how much is just deferred cost that you have to spend like travel and entertainment and sports? And then finally, David, you mentioned advertising at the upfront. Can you talk about the process now and expectations as well? How are you selling differently? You targeting different metrics? Are you doing more addressable advertising and what's the new timeframe for the upfront? Is it the broadcast year, or are you going to a calendar year? Thanks.

Okay. Why don't I start with the upfront, and then Gunnar, why don't you take the metrics on international and cost control? The upfront would have been over in a normal year, and so it's a bit of a dance, but the market has gotten – has really picked up, it's getting better. I think, in terms of the upfront, we have the best hand. We have original content; we are continuing to produce original content. Most of what you're going to see right now from us is very dependable, a fully engaged audience, and we come with, you know what, on some Sunday nights we get a four – we get over a four or four five on TLC's 90-day alone, with the Number 1 franchise on television. So one is we're way underpaid for all of our channels. We expect that even at significant increases, we will be a great value because when people look out to the other services, what are they buying? They're buying a lot of reruns. They may be buying sports. They may not be buying sports. We're the new sports people are coming on every day and watching Food and HG. TLC is the most popular service in women’s 18 to 25, 25 to 54, 18 to 49. So – and HG is the Number 1 channel for women in the aggregate. So if you want to reach women in America, you want to reach them in watching live or close to live. We’re the only place to come. We still have the Number 1 channel for men with real strength with Discovery. We've got some swagger. We really have some swagger because we look at the advertising market and we see broadcast charging $65 for CPM and delivering 0.4; we’re delivering 4.5s. We have historically been relatively cheap. We think right now, since we're the Number 2 media company in America in what we deliver, we have the most fresh content and dependable, fresh content going forward that if you want to play, you got to pay. If you want to reach people, women live, men live and know that you're going to reach them between now and the end of the year at this crazy time, you're going to want to be with us. That's as we talk to advertisers; they recognize that and recognize the strength of our brands. I think we're going to do very, very well, and I hope that we're going to make up a big piece of the differentiation because it shouldn't have existed.

Okay. And then let me cover the other two questions quickly on the pay-TV subscribers, Jessica, so right now, it's mildly up across the board. Obviously, I would say looking at international, it's just a collection of very, very many markets with very different dynamics going on, but it's up a little bit. I think the one outlier, I guess we should point out is Brazil, which obviously given the current environment was down in subscriber numbers. But other than that, we continue to see growth. On the cost control side, what's permanent, what's deferred, let's just go through a couple of elements. I would start with; let's call them the windfalls: travel, T&E overall, events, some marketing, real estate, et cetera. A lot of that obviously was a windfall and is going to come back if and when we start opening up again. I think the second, a big savings driver here ironically of course has been the absence of sports events and some other original productions. Again, we have been able to maintain a very, very healthy schedule from the perspective of fresh content and again, financially in a positive way, because we're producing a lot of content and we're producing it at a much more attractive cost per hour. Our audiences are loving the authenticity and continue to enjoy it. So that has been a positive driver overall, as things go back to normal, you should see some of that content coming back at higher costs. There may be even additional costs from some COVID-related additional health protocols, et cetera. Again, I would hope to be able to offset some of that with a more efficient overall production approach. But that's sort of the second building block. You shouldn't forget that we're still on our transformation journey. What we started two years ago, we went into this with a massive team, hundreds of people working on hundreds of initiatives; we've worked through a lot of that list, but we still have a lot of initiatives more complex, more long-term nature that we're working through, and we’re committed to continue adjusting the structure of this company to the best possible setup for the operating environment.

Great, thank you.

Hey, David, I have a couple for you. On the newer deals, will those deals accelerate or was that a natural timing? Can you talk a bit about the alignment you now have given those deals? Does that allow you now to do your bigger SUV build? And then on the SUV build, would you consider adding a non-commercial tier and also non-Discovery content in terms of making the SUV even bigger and more attractive to people who don't like commercials?

Sure, thanks, Michael. We don't really talk specifically about when our deals come up and what we do. But we had a significant amount of flexibility, we now have more flexibility. We have the lane, the full lane that we need in order to be effective. What's interesting that we found that we think is going to help us in this drive is a lot of the competitors now are coming out with their scripted series and scripted movies with the same drive. We've got more stuff. We've got more shows. Hey, buy us; we have more shows. Those shows are actually really good and they break companies. More shows, more shows, more shows. People are saying, I got enough shows. What we have is great brands, great characters. We think that’s going to make a huge difference in an environment with a lot of blaring lights for shows. As we build that, and as we have been very quietly aggregating content, and creating original content we are looking at the full gamut of what will nourish and create the most compelling product that’s the most differentiated. We think we have the right recipe, and we’ll take you through it very soon. We think you’re going to love it. We hope you like it. More importantly, when we get out to consumers in the U.S. and around the world, we hope they like our hands as much as we do.

Yes, thanks for taking the question and just to stick with the direct-to-consumer theme. I listened to some of the language you used during your prepared remarks. You highlighted the importance of reaching these 30 million plus broadband-only households. You talked about the importance of being a companion to any pay TV service. You think about this broadband households are predominantly served by cable companies, which are current distribution partners for you. Is it safe to assume that as you look to sort of accelerate your direct model, you’re looking to do it in partnership with your existing partners, not only because of the reach but also because the importance of just continuing to be respectful of those relationships? As an extension of that, with Fixer Upper coming back on Magnolia, which is awesome, should we assume that Magnolia could potentially be a centerpiece of your accelerated direct-to-consumer model as well? Thanks.

Sure. Thanks. Look, I don't want to get into any more of the details. You can expect that we think we have the best content, the greatest brands, and then a world where it's hard to curate, which is why people say up on more shows. We have this ability to curate through brands and through characters that people already know, and they know how to navigate. You should expect that we’ll be offering our content in ways that are competitive in terms of whether they have commercials or don't have commercials or how many commercials they have; we’ve thought that out carefully. We intend to make our product very competitive and flexible. We expect to have multiple partners and that's how we're going to be successful domestically and around the world, and we'll take you through that. Disney has been very successful by using partners. We have been more successful when not only are we marketing our product but other distribution platforms are marketing our product. Whether it’s table, distributors, mobile distributors, or larger players that are pushing other products like Amazon is doing with us with Fire, every one of those is an added opportunity. Like everyone else, we're looking for all of those to get the scale and build it quickly and aggressively.

Great. Thank you.

Thanks. Good morning. Maybe one for Gunnar just on the near term. Anything you can tell us sooner about affiliate trends as we think about the back half of the year? I don't know if the second quarter is a decent kind of run rate for U.S. and international. For David, just going back to your point about lanes and open lanes, AVOD is an area where we're seeing at least a lot of growth in consumption. Your company, given its scale and advertising audience seems perfectly situated to exploit that as the ad market comes back. Is that a strategic priority for you for Discovery in terms of investing in either ad technology, a more targeted ratings approach than just standard Nielsen demos? There have been some acquisitions in the space, like Tubi and Pluto. I'm just wondering how you think about that opportunity and whether that's an area of focus for the company?

Ben, let me start with the trend question. Again, I don't want to give specific guidance, and there's not too much to add to what I said a couple of minutes ago. U.S., feeling good about the pricing trends; we don't control the subscribers, and we'll see over time as D2C ramps up how that starts contributing. On the international side, a similar answer; the key factor here is sports, and that's two-fold. Number one, as we already pointed out, the termination of the Bundesliga contract is going to be a little bit of a drag on affiliate revenues. But as I pointed out, it’s beneficial to AOIBDA. The second factor is some sports have come back but the majority of the big events are still slated for us a bit later in the third quarter and partly in the fourth quarter. That's going to be a driver, and we'll see how that pans out.

I guess, to answer your question on the AVOD, we've been quite successful with our GO products, even though they are just individual channels that are authenticated. But we’ve been able to get a very young audience and get additional data, which has helped us get what the advertisers have liked. We do have a team that's driving our data; we're also working innovatively with a number of the cable operators who have set-top box data. I do think that data is a huge piece of our future in order to get higher value for our existing content. In products where we’re going direct-to-consumer, AVOD, or SVOD that has a commercial light, I think you'll see that ability to provide data to advertisers that benefit both us and them.

Great, thanks.

In your prepared remarks, you talked about increased flexibility on next gen products. Do you mind just elaborating on what flexibility you are seeking? And with those four renewals you talked about, do you have that flexibility globally now, or is it still just in a subset of your global footprint? Thanks.

We have it globally, fully globally. When we take you through our aggregate global plan, we'll give you more detail.

Thank you. Just sort of a general question on advertising: you guys continue to extract higher pricing. I'm curious if the ratings continue to go up the way that they have? Are all the old rules sort of thrown out the window in terms of broadcasting, getting premiums versus cable? Can you sort of surpass that eventually? Then my second question is really on the rebranding of DIY in terms of early 2021. Any progress so far in terms of potentially getting more distribution for that channel?

Sure, thanks. We have gotten more distribution for DIY. I mentioned, I think, on the last call that when Chip and Jo were on DIY on a Sunday night, viewers were actually looking on Google to figure out what channel DIY was to watch it. They did watch it, and it was the number two show on Sunday night on television behind 60 Minutes. So we think we're super excited about what's going on with them. I spoke to Chip and Jo yesterday for an hour and a half, they're excited not just about Fixer Upper but about everything that's going on in Waco, with the production and the brand. It's very exciting, and they will come on to DIY with more subscribers. As a channel, it's been growing significantly because of the environment where people are at home and the content works very well. We feel very good about it. It will be early next year. As for pricing in general, can – can the gap really disappear between you and broadcast? I hope it does, because if it does, then you can put a multiple of 2.5 times against our ad revenue. All kidding aside, we're dealing with a legacy issue. That legacy issue really doesn’t make sense anymore. How much do people watch? How much did they watch live? How engaged are they? If anything, if you're selling products, being on HG or Food or cooking is probably a lot more important for a lot of advertisers than being on a regular show, even a sports show. A lot of advertisers have told us their ability to convert products is stronger on us. We have this inverse problem based on the fact that cable was at the kids' table. We’ve aggregated the very strong brands, we’re investing, we have invested hugely in building those brands, characters, and relationships with the audience. We’re starting to really breakthrough. We have to fight to get our fair value, and we have to be – in the end, I think the equitable argument we have has started to break through a little. In the last two years, you've seen us outperform quarter after quarter. You should see us outperform by a lot more, in my opinion, because in the end, we have great content that people love. In this very unusual environment, we also have original content and dependable ongoing product at a time when some of our competitors can't do it because of sports, and scripted is harder. We hope so. We are fighting for it. We've got a great leader in Jon Steinlauf, we’ve got a great team. We're very engaged in the upfront, scatter, and we need to keep telling our story. They know it. We have to figure out how we wrestle it.

Thank you.

Hi, thanks for taking the question. David, I guess the question is as you and others, I think of NBC, I think what HBO Max just did, as everybody is finally kind of making the pivot to direct-to-consumer, where do you think – I mean, we're probably around high 70s, 80 million subscribers in the multichannel bundle today. Where are you thinking bottoms out? And as you think about Europe, with Disney taking a huge write down and sort of pivoting to D-to-C overseas, how do you think about kind of the state of Europe relative to what you are seeing in the U.S. for the multichannel universe?

Thanks, Rich. Well, first let me just start with Europe. Europe, I think, is much more stable. In terms of what we're seeing regarding viewership on that platform, viewership was way up on traditional television—the whole marketplace performed very differently and much more favorably. The idea that we were significantly up, all of our sports weren't even on. People were watching so much more of our content, which by the way, I think the fact that people are watching a lot more of our content, in the end, we're an IP company. The fact that they are spending more time with our brands and characters just means that our overall IP library has emerged from this behaviorally, spending more time with our brands and characters, and they love us more. We love them more and we know them better. I think we emerged stronger, but Europe is more stable. The decline is much slower. There's huge broadband here. Amazon is a great, great product, but it's not deployed with local content the way it is here in the U.S. The U.S. is one market, 330 million people. Netflix has been extraordinarily successful; Amazon is successful; Disney Plus is successful. There’s a huge amount of broadband. You see this and a lot of marketing dollars telling people what's on those platforms. None of that exists in Europe. Our local language and local sports, we think is pretty compelling. The fact that the ecosystem is more stable also gives us, given how big we are in Europe in both sports, free-to-air and cable, gives us, I think, a much stronger position.

Are you surprised by Disney's move to sort of abandon Europe?

I don't really want to comment on Disney. It's a great company. I think Bob has done an extraordinary job in building IP and building that company. For us, I look at what we have. I really like what we have in Europe. I like the differentiation of what we have. I love the IP that we have. In the U.S. I can’t predict where it’s going to go, but we're on every skinny bundle. Everyone has taken real notice. We have content that people love and with a very core of that bundle. If people have cable TV and they have six channels that they watch, in almost every case, those six are us. We'll do very well on advertising that we deserve. Our subscription fees will continue to be good, because we deserve it. The reason we're going so hard direct-to-consumer is because we want to make sure that our great content is on every platform and has an opportunity for everyone to see it. When they do, we think they're going to be very happy, and we think we're going to do very well.

Really look forward to trying it.