Warner Bros. Discovery Inc (WBD) — Q2 2021 Earnings Call Transcript

Good morning everyone. Thank you for joining us for Discovery's Q2 Earnings Call. Joining me today are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perret, President and CEO, Discovery Networks International. 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 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, as well as statements concerning the expected timing, completion and effects of the previously announced transaction between the company and AT&T relating to the WarnerMedia business. These statements are made based on management's current knowledge and assumptions about future events, and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2020, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Good morning, everyone, and thank you for joining for second quarter earnings call. Discovery continues to deliver strong operating and financial performance, driven by healthy momentum across all our key segments beginning with our core linear business, which continues to accelerate sequentially underscoring the durability of our content category and the overall strength of our brand, while simultaneously scaling on global streaming offerings. Most importantly, Discovery+, which continues to have strong traction underpinning total next-generation revenue growth of 130% year-over-year and $17 million total global paying direct-to-consumer subscribers at the end of the second quarter and $18 million as of today. With momentum around the globe, most notably behind the strength of the Olympics, we launched Discovery+ in Europe in a number of markets, including several areas where Discovery+ had yet to launch and we have seen fantastic traction thus far. We are excited about prospects for the second half of the year, as well as for the Beijing Olympics, more on all of that in a moment. The combination of continued strong execution across our core business, while scaling our streaming platforms drove healthy top-line growth and strong OIBTDA and free cash flow conversion, supported by vigilance on costs. Gunnar and his team continue to do a terrific job leading transformation across the organization with an eye toward continued efficiency, particularly as we absorb investment spend and support the growth and roll out of Discovery+ and we delivered a meaningful sequential improvement in our investment losses as we lean into monetization and begin to see the benefits of scale from an expense base. In fact, this quarter, annualized next-generation revenue is $1.6 billion and we see additional revenue growth ahead. In terms of the core, as you’ve heard from our peers, the industry just wrapped an incredibly healthy upfront providing us with the level of visibility we have not seen in quite some time. Jon Steinlauf and his team delivered top of peer performance and a record for our company, a testament to the programming and brand that viewers love and that our advertising partners value, as well as our differentiated suite of products and platforms available to reach consumers in an increasingly fragmented marketplace. We achieved rates of change inclusive of the step-up performance at Discovery Premier that we are well ahead of the peer group. Premier has proven to be a great success. A unique vehicle that features first-run episodes from our most popular series and networks in which sales more than doubled. Over 200 clients are now buying Premier at ratings and reach that is equivalent or greater than broadcast prime, but at a significant CPM discount. You've heard me talk this as a true win-win and we keep driving this forward, which clients love. Moreover, demand for our bouquet of digital properties across Discovery+, our Go apps, VoD and site with social was robust. Advertisers continued to look for incremental reach beyond linear and with roughly half of the audience for Discovery+ being non-cable households, the platform is hugely attractive to buyers. We look forward to additional product features and offerings to roll out throughout the year to drive further monetization. But what we are currently seeing is noteworthy. Advertisers are buying targeting capabilities of our platform with innovative and intelligent solutions at healthy premiums to traditional linear. Internationally, advertising has also come back in a big way, driven by a number of key markets such as the UK, Italy, Germany, Poland, as well as a number of Latam and APAC markets that resulted in all regions around the globe turning in an acceleration and traction throughout the quarter. Turning to Discovery+, we are really pleased with the cadence and monetization of the service. Supported by continued subscriber traction and healthy ARPU, notwithstanding the seasonally slower summer period, only exacerbated by the post-COVID reopening. That said, we had healthy sequential improvement in paid subs quarter-over-quarter with most of Discovery+ international runway still ahead. Here in the U.S., we continue to add to our distribution and platform footprint. Following last quarter’s launch with Comcast, in the coming months, Discovery+ will also be available to Comcast subscribers across their Contour TV and Contour stream player platforms. Discovery+ will also shortly be available on VIZIO SmartCast, advancing our rollout to all major consumer platforms. As we've noted previously, the bulk of the 2021 Discovery+ international market launches would be in the second half of this year with key market launches such as Brazil, Canada, and the Philippines to come in the second half of the year. Vodafone successfully launched in July in the UK market for mobile customers, and we expect additional markets such as Spain, The Netherlands, and Italy to launch as planned following the migration of our front-end technology to our common global platform this fall. JB and his team have been deliberate and methodical in managing our international rollout to ensure the best consumer experience. This includes ensuring we have strong integrations with local partners and completing a major replatforming to get both our front-end and back-end technologies on one common platform. It is a complicated roadmap of engineering and commercial logistics, not to mention COVID challenges around the globe in some of our tech hubs. At the same time that we have been planning, producing and delivering the Olympic games from Tokyo. We continue to learn a lot as we go in terms of what's working and what's not with respect to marketing, branding, tech product and features, as well as distribution partners and platforms. We are very pleased with the metrics we look at to evaluate our position within the marketplace, consumer acceptance, roll pay, viewing time per active subscriber, churn, monetization and so on. We’ve provided an early glimpse across these metrics last quarter, and I am pleased that we continue to track well against our internal plans and the momentum we are building as we look ahead to our exciting plans post-merger with WarnerMedia and HBO. Taken together, we could not be more excited about the possibilities ahead to serve consumers with the deepest and most compelling content offering in the world. Consumers want choice and simplicity. We believe that the combined company will be able to offer more of both in a video market that could see more consumer selectivity as the market matures. We believe the combined company will be well-positioned to compete in the global streaming marketplace. The regulatory process continues to move forward as planned, giving us confidence in our previously stated timeframe of mid-next year to close. And lastly, the Olympic games in Tokyo, which has been a very pleasant surprise during what can only be described as challenging circumstances. At this point, about halfway through, we've already doubled our total subscriber gains from the last Olympic games in Pyeongchang. With nearly three-quarter of a billion minutes of Olympic content streamed, up over 18 times versus the last case. Like with the winter games, we've enjoyed some truly remarkable viewing shares in key markets like the Nordics where our share of television viewing for certain sports has been upwards of 60% to 80%, with outstanding traction with streaming across all markets, notably in the UK and Italy, which are newly launched markets for Discovery+. We are very excited about the upcoming Olympic games in Beijing in early 2022 and then, of course, Paris in 2024, right in our backyard. These are truly hallmark, high-value branding events and our super funnels that drive awareness, viewing, and subscribers to our platforms. With that, I'd like to turn it over to Gunnar to take you through our financials, after which Gunnar, JB and I look forward to taking your questions.

Thank you, David, and good morning, everyone. Thank you for joining us today for our second quarter earnings call. Echoing David's comments, I am very pleased with our operating performance this quarter, with both our traditional core linear business, alongside our next-generation streaming platforms combining to deliver very healthy revenue growth and impressive AOIBDA and free cash flow conversion. While comparisons against last year's advertising performance were very favorable, we are especially encouraged by the acceleration and sequential improvements we've enjoyed from every region around the globe and returned to near pre-pandemic levels in the U.S., Latin America, EMEA, and Asia Pacific, all turning in impressive results and of course, Discovery+ is providing a nice tailwind to our performance. Turning to second quarter results, beginning with the U.S. segment. Advertising revenues increased 12% year-over-year, as we continue to take advantage of a very robust advertising market for both linear and digital inventory. We saw strong demand in all key categories including CPG, pharma, cosmetics, auto, retail, and home improvement, far more than offsetting the softer viewership across the industry, as compared to the peak COVID Q2 of last year. Scatter CPM dropped 50% plus versus last year's upfront at up 130% year-over-year. Additionally, next-generation advertising demand was very healthy across our suite of products with revenues up 70% year-over-year. Specifically, for Discovery+, more than 800 advertisers have now bought inventory on the platform, more than 4 times the number of advertisers that we had targeted by the end of the second quarter. Interestingly, more than 90% of all clients who have bought inventory in Discovery+ also bought inventory in our Go and TV Everywhere offerings underscoring the power of integrated audience solutions across our suite of digital products. Furthermore, we continue to roll out new ad products on Discovery+. For example, we recently launched Green Lives, an ad product that allows clients to own the first ad served to every user on Discovery+ on a specific day. As noted earlier, the strength of the upfront market underscores the continued relevance and importance of television as an advertising medium contributing to greater confidence in our ability to drive top-line advertising revenue growth. While we face comparisons against political advertising in the second half of the year and some modest headwinds from the Olympics here in the U.S. in Q3, layering in the tailwind from this upfront, we should enjoy sequentially faster revenue growth in Q4 over Q3. Distribution revenues grew 12% year-over-year on a reported basis, or 18% like-for-like, primarily driven by continued traction in monetization of the Discovery+ subscriber base helped by linear affiliate pricing, offsetting the year-over-year decline in Pay-TV subscribers. Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio subscribers were down 7%. However, recall that we sold Great American Country during the quarter. When adjusted for this sale, total portfolio subscribers would have been down 3% year-over-year during the quarter as we continued to benefit from specific distribution gains across certain networks from recent new awards. We will begin lapping those in the coming months and you should expect to see our linear subscriber trends more in line with the industry going forward as we have discussed prior. Worth noting also is that the sale of GAC did result in a modest headwind to both reported advertising and distribution revenue this quarter as we did not recognize any contribution from our partner so far. Turning to the International segment, which I will discuss on an ex-FX basis. Advertising revenues increased 70% year-over-year as we saw significant growth off the second quarter last year. We saw strong revenue growth across all regions with the pace accelerating throughout the quarter with a number of key markets nicely above 2019 as David mentioned. Distribution revenues increased 6% versus the prior year, supported primarily by direct-to-consumer subscriber growth. So, as noted, there were no material new market launches during the quarter, partially offset by lower linear affiliate rates in certain European markets. Total company operating expenses increased 33% during the quarter. Cost of revenues increased 25% year-over-year, as sports returned to a more normalized schedule this year versus virtually no sports last year due to COVID-related shutdowns, as well as the continuing investment in B2C content. SG&A increased 43% versus the prior year as we invested in marketing and personnel to support our Discovery+ rollout. We continue to focus on driving efficiency in our core linear networks and remain on track to reduce core linear OpEx in the low to mid-single-digit percentage range for the year. As we guided, we reduced our losses from investment projects significantly in the second quarter to roughly $250 million versus more than $400 million in the first quarter, benefiting from both strong next-generation revenue growth, as well as more efficient marketing spend, primarily in the U.S. Q2 next-generation revenue growth of 130% is annualizing at the $1.6 billion run rate and we expect additional sequential quarterly revenue growth through the year and beyond. As we launch in new markets during the second half of the year, we expect that we will continue to incur investment losses in the same ballpark as this past quarter, mainly driven by content and marketing costs. We continue to expect investment losses will peak this year. Overall, we remain very pleased with all of the core KPIs we closely monitor and continue to track well against our internal plans. Global direct-to-consumer ARPU remains consistent with Q1 as the impact of certain international partnerships and associated early promotional activity is offset by our strong and growing U.S. ARPU, which is nicely supported by the ad-driven Discovery+ product. Roll to pay still remains high at an average of close to 80% across the global D2C portfolio. As the average base of per viewing subscriber, which is more or less in line with what we saw last quarter, and we remain pleased with overall churn, which is naturally at the lower end for most of the mature subscriber cohorts and skews higher for the most recent ones. As I noted, the vast majority of our international Discovery+ sales thus far has come from existing markets. We plan to launch in a number of key markets and territories during the second half of this year, including Brazil, Canada, and the Philippines, alongside the additional Vodafone launch in Italy, The Netherlands, and Spain around the end of the year. It is worth highlighting that a handful of these market launches have been extended out about a quarter or so later than our original internal plans called for, primarily resulting from the requisite harmonization of our technology platforms, the added benefit of Rich will enable us to roll out at international ad-driven products. This has been a heavy lift, particularly given team constraints related to COVID in our tech hubs, primarily in India. Other puts and takes to consider will be our ability to maintain and keep subscribers that come in during the Olympic games, though the initial roll to pay numbers were very encouraging. Net-net, we remain very excited about our local go-to-market strategies across these important countries through the end of the year. Turning to housekeeping items. Net income for the quarter was $672 million or $1.01 per share on a diluted basis. First, please note we recognized a $0.09 per share gain on the sale of Great American Country as well as a $0.09 per share non-cash gain on an existing investment in Sharecare, the company that recently went public. Second, our effective tax rate during the quarter was negligible as we recognized certain non-cash cash tax benefits totaling $162 million or $0.24 per share. Given these tax benefits, we now expect the full year effective book tax rate to be in the mid-teens range. For cash taxes, we are now anticipating a slightly higher rate in the high 20% range for the year, excluding PPA amortization, as we are positioning our tax footprint for optimal outcomes across a number of legislative scenarios for 2022 and beyond. Third, and finally, the PPA impact was $0.30 per share. Adjusted for the above, EPS would have been $0.89 per diluted share. Now, turning to free cash flow and our leverage. We generated $757 million of free cash flow in the quarter, representing a near 70% conversion rate of AOIBDA, notwithstanding the continued investments we are making, as well as the return to normalized content production levels. Year-to-date, our AOIBDA-to-free cash flow conversion rate is nearly 50% and we remain confident that we will convert at least 50% of our AOIBDA to free cash flow this year even with the anticipated new market launches and slightly higher cash taxes mentioned earlier. At the end of the quarter, our net leverage was three and a quarter times, which is within our current target range. We expect our net leverage could be temporarily at the high end of the target range due to the Olympics in the current quarter. As a reminder, we do expect to recognize $175 million to $200 million of AOIBDA losses during the third quarter as a result of the Olympics. Therefore, we continue to expect that we will break-even or generate slightly positive AOIBDA and free cash flow over the life of the deal. As indicated, when we announced our transaction with WarnerMedia, we did not repurchase any shares during the quarter, as we continue to invest in our next-generation initiatives and conserve cash ahead of the closing of the deal. Finally, we now expect FX to have roughly a positive $100 million year-over-year impact on revenue and a negative $20 million impact on AOIBDA in 2021. We continue to operate on a solid footing dynamically growing our direct-to-consumer business with contributions to our top-line growth becoming increasingly meaningful and optimizing the resilient core linear business creating strong conversion of AOIBDA to free cash flow. We remain focused on delivering solid operating performance, while we've built the framework to support long-term sustainable growth and shareholder value. And we are eager and excited once we gain all the requisite approvals to roll up our sleeves to capture the tremendous opportunities offered by our proposed merger with WarnerMedia. Of course, we look forward to speaking with you at the appropriate time on our thoughts and plans around integration, strategic direction, synergy, etc. With that, I'd like to turn it back to the operator to take the questions.

Good morning and thanks for taking the questions. And just on direct-to-consumer, can you help us better understand the international roll-out trajectory? I know you called out Brazil, Canada, Philippines and a few European markets with Vodafone for the back half of this year. Some of these are particularly big broadband and mobile markets. I'd be curious which market launches or distribution partnerships you see as the biggest opportunities? And maybe more broadly, how are you thinking about the subscriber momentum into the back half of this year, especially I think there is some concern that we might see some churn pick up with some of these distribution partnerships that had fixed-line promos. And then, just lastly, I know it's early, but any thoughts on the international roll-outs looking for 2022? Thank you.

JB?

Yes. So, we have, as you noted, we have the markets we've announced that we'll be rolling out. I think we feel very good about them. When we get closer to the actual release date we'll also be announcing in many of the markets, as we’ve done to date, both in the U.S. as well as internationally, partners that will be launching with, and so you should expect consistent with our historical precedent from strong partnerships in a few of those markets that we roll out. And so, we feel good about that. I think as Gunnar touched on in his comments, they are all sort of leaning towards more September and into the fourth quarter where we had hoped obviously to be slightly more ahead of that into the third quarter, but due to obviously wanting to make sure we got the Olympic games off the ground successfully and getting this replatforming completed, some of that will hit a little bit later in the second half of the year than we had initially thought. And in that time period, I think we do see internationally some growth coming out of those new market launches as we get towards the back half of the year. As it relates to 2022, I think it's a little bit early to talk about that. The only comment which David and Gunnar made amplify is, obviously, as we get later into 2022 when we get further visibility on the timing of the WarnerMedia deal, we will look at making sure we stay smart in the context of when that timing and when that deal might close as to how we maximize the rollout schedule of those services into 2022. So that's I think as much as now. Gunnar or David, if you want to add anything else?

Just to add, the execution on the Olympics was really almost flawless. And you - all of our - the entire Olympics was offered throughout Europe on our product. People are spending a huge amount of time; it’s 18 times what it was before for Pyeongchang. It was very simple. The navigation was simple. We spent a lot of time making sure we got the product right, that's going to help us, but we're also, as I've said, we are learning. One of the things that we've learned along the way is that navigation and simplicity are very important for people who are able to find the products that they want, particularly with a complicated product like the Olympics, and it's really working. We'll have Beijing coming up in a few months. It's very unusual that we get it back-to-back like that. So we think that we can do better in terms of keeping subs and growing subs because we don't have a two-year lag between the two games, which is advantageous. The other thing that we're learning as we look to roll outside the U.S. is that, ad-driven is a really compelling product. We're generating about $6 in advertising per subscriber here in the U.S. with three minutes of advertising, and the friction for users is non-existent, which is a stark comparison to when they used to see 14 to 18 minutes in typical players. That may present a real strategic opportunity for us here. We're doing extremely well packaging that product together with linear and AVOD here in the U.S. Whereas a year ago, we thought everything would just be subscription, we're evaluating AVOD as a meaningful opportunity to go into markets at a lower price, achieve greater scale and potentially generate more revenue. We're making more money on our ad-driven product than we anticipated in the U.S. So, doing that requires more engineering and more coding, but we want to get it right. As JB said, as we get closer to the Warner Brothers Discovery transaction, we'll continue to look - right now, we are both accelerating and Warner is doing an extraordinary job. John Stankey, Ann, and Jason are demonstrating formidable momentum. You take a look at the ongoing success with Casey, and what they have achieved with HBO Max, and we are mutually supportive. This is an exciting period.

And Kutgun, maybe one thing that I'd like to add is your question on churn. So that continues to track very nicely ahead of our plans. Most importantly, roll to pay is also very stable as I said close to 80% across our various products. To your point about some of those distribution partnerships starting to come off of the initial period, that's another area where we've actually been positively surprised. It’s a little lower there than we expected, but not as meaningfully lower as we had modeled. It's actually been a positive surprise.

Okay. Let’s go to the next question.

Thanks. One for David and one for Gunnar. David, some press reports suggested that you might have made some comments at Sun Valley about the merger, timing, and further industry consolidation. So those of us who weren’t invited to the conference, I was wondering if you could just maybe expand on some of those comments in this public forum. And then, Gunnar, I think you reiterated doing a huge investment this year in terms of the AOIBDA drag at next-gen. As you think about the merger with WarnerMedia and the B2C services, I know selling still remains pretty sacred, but when you think about factors, is there any reason you might decelerate that, which you're going to be combining all these systems at some future point? And could that lead to any upside to maybe the five times leverage target when you close? Thank you.

Thanks, Steven. Well, let me first speak to the merger timing. I was in D.C. last week. I met with stakeholders across the board and spent the full day. There is broad support for this transaction. We haven't heard any pushback or seen any red lights. This combination creates a very strong company for consumers and a more compelling stream of business. Right now, it feels to us on every level like we've encountered green lights, and we are not seeing any yellow lights or red lights. Having said that, we are not in control of the timing. Disney was able to get their deal done in six months. Everything so far is extremely positive, but some of the timing with respect to the IRS and DOJ could fluctuate. They are working very effectively with us. The AT&T team and John have a terrific team that's working with our team. Ultimately, it could be significantly sooner or a little later, but we feel very good about this point. There is nothing that we see as concerning. I still hope we could get it done sooner.

Okay, Steven, let me take the other question on peak investments. Again, we’re reiterating that expectation that 2021 is the peak here. And again, I think it's coming together very nicely. You're seeing the revenue contributions ticking in. We're tracking at an annual run rate of $1.6 billion. Next-gen revenue is showing a significant drop in our startup losses from our investment initiatives overall. To the second part of your question, HBO Max had guided to 2022 being their peak investment year. That's how we’ve reflected in our model as well. There is no update right now. It's operationally under our control. I don't want to give an update on that five times leverage expectation right now, but I view that as a non-issue. We have a ton of confidence that we will very, very quickly get to where we need to be.

Okay. Let’s go to the next question.

Thanks so much. A couple of questions, if you don't mind. Gunnar, on SG&A, it was down quarter-over-quarter in the United States, and you mentioned coming off of launch marketing or more efficient marketing? Is this 2Q level sort of a good SG&A level that we should expect to continue? JB, and David as well, what have you seen from Discovery+ so far in international markets? How does that inform your launch strategies for upcoming markets? And in particular, if you think about pricing for this service, are you better off pricing at a premium for super fans or pricing low and trying to drive the services broadly as possible? Thank you.

Let me take the SG&A question quickly. The way I would look at this, Doug, is that I view this sort of $250 million level of investment losses as a probably best estimate as of today for the third and fourth quarter. That implies since we're assuming revenue growth that we are planning to spend more. Again, we want to continue making those investments to grow products with a strong long-term value proposition. So you should see a general trend of expenses growing but very much in line and slower than the revenue side.

In terms of our all-in mission, we won't get into how we are going to price in each market at this point, as it wouldn't be appropriate. We have a compelling plan. We are looking at – we are going country-to-country. We are actually trying some different things to learn more. We're watching the great success that John and Ann are having as they accelerate. But, we're focused on 200 million global subscribers. This is not about niche. This is about global subscribers and for me, after we close this deal, it is going to be two absolute missions. Mission number one is to drive direct-to-consumer to 200 million subscribers in every language in the world and with a product that's easy to navigate and use. We believe we can do that when we close, as we're both growing. So, we're starting with a solid base. That's the left side. The right side is to focus on having the best creative company in the world. Warner Brothers has been the greatest creative company in the world.

And if you want me – and just one thing I can say on the current pricing to your question on Discovery+. What we've seen so far is very broad and scaling distribution. This international growth is not driven by one market. We've seen very even and very significant million-plus markets so far across some of our biggest territories. We feel that it's not necessarily a question of going high-price small or low-price broader. The reality is that we're able to hit this sweet spot with the pricing that we have in most of our markets, which is on average for entertainment in the $4 to $6 price range, and that’s scaling very nicely. Now, again, it’s hard to discuss the globe in one swoop, because ultimately markets with more premium sports will price higher, and those markets with lower price sensitivities like Latam or Asia will price lower. But overall, we feel that we can hit a very attractive price point, much higher than our wholesale pricing today while still delivering a sweet spot for scaling.

Okay. Let’s go to the next question.

Hi. Thank you. David, maybe we could start; can you give us more color on Discovery Premier? How much more inventory is available for you to sell into the market? Can you delve a little more again? And what does the CPM lift relative to the rest of the portfolio? And then, maybe shifting to Discovery+, any more early trends you could talk about from a viewing perspective? Is the proportion of time spent on specific networks or programs consistent with your linear networks, and for the content that's premiering on Discovery+, are you seeing a lift in subscriptions or impact on the new ratings? Thanks.

Thanks, John. Well, first, the upfront was the best I've seen in my career. On average, it was up about 20%, and we were able to beat that significantly. I believe we were best in the market, but this was a market that was up 20% and we picked up. We did much better than that, and one of the reasons is the Discovery Premier. In some ways, it's a great story, but it starts off with the fact that we're not getting enough and we haven't been getting enough for in CPM for the great content that we have. Broadcast is in the 60s and where we were in the 20s. So, one, we made progress against the broadcasters. But Discovery Premier is in the 40s. Advertisers to be able to get content with the same or better reach at a significant CPM discount. For us, it's a dramatic increase. But for advertisers, it's a significant decrease because instead of buying a broadcast at $64, they are buying us for $45 or $43 or $47. It's a real win-win. We have great demos and we're able to service. We have the premier product, and now we have Discovery+ with the engagement and much younger audience. We have been able to put together a really compelling package. Our most successful upfront was realized due to this. Ratings are down in the aggregate; it is something we'll have to live with. In the 90s, ratings were up while broadcast was going down, and advertising rates kept rising. It's been going on for 20 years. I can't predict what will happen, but inventory is declining, and we are one of the best in the business. We hope this trend continues.

Generally, to your question about engagement on Discovery+ and content, it does, it largely follows our biggest networks. The genre is primarily in crime, paranormal, and home, the traditional core genres in the linear space are driving our Discovery+ activity in the U.S. Reality content, particularly in TLC, is also a big driver for us. As you spread out and go internationally, it becomes a bit more diverse in the sense we have bigger broadcast content in markets like Poland, the Nordics, and Italy. Bigger entertainment formats are working extremely well, and then sports, which we discussed, both in terms of the Olympics and outside of it. It's a slightly more diversified story outside the U.S. but in the U.S., it is driven by a lot of the core content.

Okay. Let’s go to the next question.

Thank you. A couple of questions. There have been press reports regarding your interest in Channel 4 in the UK. And I mean, it's great that you are still looking at transactions, given you’re about to close one of the biggest. But can you talk about M&A priorities or opportunities outside the U.S.? Can you give us an update on what's going on in Poland from a regulatory perspective? And then, finally, in advertising, how much crossover is there on the various platforms for your advertisers? Or are you tracking different advertisers for different platforms?

Well, let me start and then JB I'll pass it to you. We can't comment on Channel 4. But I would just say, we're focused on one thing and one thing only: closing this transaction and putting together this spectacular company that has global IP leadership in terms of the content that we have, local content, sports news, the best bouquet of content, together with strong leadership at both companies. This is our focus: close this deal and drive this company; mission number one is to drive the subscription piece and create a culture where creative talent wants to come and tell their stories. We're not going to comment on specific transactions at this point but I do believe that there are a lot of players that are sub-scale. Many of them will be evaluating what they do. The good news for us is we think our hand is very, very strong. We're focused on getting this deal completed and driving that hand to market.

And Jessica, the only thing I'd add to that is that we're proud of the fact that every time anything is potentially up for sale, our name gets mentioned because we’ve had a successful track record of acquiring, integrating, and managing businesses successfully. The reality is, as David said, our focus is on the closing of the Warner deal. Our primary focus is on that. In terms of ads, we have a vast majority of our clients overlapping between linear and digital. So, it's a very strong correlation and a great number of clients engaging in both sectors. On Poland, we remain committed to the business. It’s a growth business and a healthy business for us. The environment is challenged, and we're actively talking to all the various stakeholders to make our case. We believe it would be economically irrational for the government to enact laws that would change our position and make it less attractive for foreign investment. Thus far, the U.S. government and the EU have been supportive, and we'll keep you posted as that situation progresses.

Thank you.

Good morning. David, following up on your earlier IP comments and tying in what you're seeing with the Olympics. Can you share updated thoughts on how important international sports are to your company, especially concerning driving Discovery+ subs when the next round of sports rights come due? And then for you or JB, can you update us on how the Pay-TV ecosystem looks outside of the U.S. as it relates to cord-cutting, and whether you plan to be more aggressive in shutting down linear cable networks as Discovery+ ramps up?

Let me start by addressing cord-cutting. Outside the U.S. in the aggregate, with the exception of the last quarter during COVID where we really grew, we're doing as well or better as we've ever done historically. This past quarter, we were much stronger than we were overall in share than we were in 2019 or any prior years. Unlike the U.S., where pricing is so high, entry-level cable pricing is much lower around the world. There is some decline in viewership, but it's more moderated compared to what it is in the U.S. JB, you can further elaborate on that.

As David said, we broadly see some cord shaving, but the cord cutting has remained fairly stable internationally. We don’t see the same dynamics observed in the U.S. The cord shaving represents higher-tier issues and people churning down to lower tiers in certain markets. These are limited in higher-priced markets like Northern Europe. In Brazil, for instance, macroeconomic reasons have led to subscriber decline, but we know that video consumption remains strong. Importantly, now with the Discovery+ launch, we’re at an even more attractive price point than what they would have paid for a typical Pay TV package. We're excited to see those subs that left the Pay TV bundle return to us at a more attractively priced Discovery+ option moving forward. Regarding shutting down cable networks, we currently see a very healthy business in the Pay TV sector. We have successfully done hybrid deals with existing partners that maintain carriage for some of our channels while also launching Discovery+. We don’t foresee an aggressive shutdown scenario for the time being, but there may be specific markets we consider experimenting with in the future.

On the sports front, we are learning. We've been in this space for over four years and needed to find a better product. The good news is we're experimenting with multiple approaches. Ultimately, the consumer will decide how they want their sports. We've noticed more success when we package sports with entertainment and non-fiction. The current trends are positive regarding subscriber acquisition related to sports. We are also keen to compare our offerings to Warner's recent success in Latin America.

I want to repeat one thing that David said in passing, just to ensure everyone has heard this: Our second quarter was the second strongest in our history internationally when it comes to actual viewership, second only to last year's second quarter, which was impacted by the COVID spike. It is a fundamentally different story internationally versus domestically.

We are getting better at producing localized content that audiences love and want to watch. We are gaining share. Even though some may be veiling on linear, the linear advertising market remains extremely strong. Our share is growing, and we are challenging ourselves to create programming in diverse languages across the globe, and that is paying dividends.

Let’s go to the next question, please. Thank you.

Thank you. Good morning, everybody. I want to ask about the upfront and then also about the streaming subs here in the third quarter. David, obviously, there is tremendous demand for linear television as we head into the fall season. Can you talk a little bit about whether Discovery was able to navigate some of the measurement challenges that Nielsen has created in the past around delivery and make us, were you able to do more non-Nielsen deals? Or do you think that’s even cost the company any money in the past? I know you've spent a lot of time on it, and it seems like the demand side of advertising is strong. I am curious if you could just comment whether you guys feel like that's a headwind or you've sort of navigated around it? And then on streaming, I don't know if this is for Gunnar or for David. The $18 million number, I guess, captures probably the Olympic lift you've got. It seems like you're talking about most of your international launches coming in Q4. I am just wondering if there are other headwinds or tailwinds we should be considering in the third quarter or if we should think that there probably won't be a lot of growth here in August and September. Just anything you want to add as we think about Q3? Thank you.

Thanks, Ben. Look, we have a big data operation. The good news is, on Discovery+ and our Go apps, and to some extent on linear, we've focused on building our own data and working directly with advertisers, which has been extremely helpful. In the end, if we had better data, you would see a dramatic increase in our capabilities. Unfortunately, Nielsen has proven ineffective. It's disappointing that the system is antiquated, and we've collectively lost revenue because of it. Everyone has learned to navigate it, but Nielsen's reliability remains suspect. As an industry, we have to find a way to deal with this technology-wise; we can and should evolve beyond them.

On the streaming subs, let's keep in mind that it is very early for us—we don't even have a full year of normal operations yet. There is indeed seasonality throughout the year, and the summer months, as expected, are not our strongest. The numbers reported indicate we've been able to add an average of 1 million subscribers, which I find very pleasing. Note that the 18 million subs figure comes with a certain level of free trial, meaning it doesn't reflect all the subscribers we might gain during the Olympics.

Let’s take our last question, please.

Hi. Thank you. Just two quick follow-up questions; one on advertising and one on your streaming service. On the advertising side, it's been incredibly strong, which you've highlighted through the second quarter. We’ve seen it industry-wide clearly in your results. I am curious if you are observing any cracks in the advertising strength in so far in Q3 just given the delta variant and sort of the recent return of spikes in the pandemic? And then my follow-up question really refers to the Ad Light product that seems so much more profitable in terms of bringing in more revenue. Is that where you're seeing a higher percentage of growth in terms of the new subs?

Thanks for the question, Alexia. We're not seeing any slowdown at all due to COVID, and in the aggregate, we are now flat to where we were in 2019, which is significant. So when we say we’re up this percentage or that percentage as compared to last year, we are about flat to 2019, which gives us a good foundation to strive from and seek cuts to accelerate growth. The Ad Light product is impressive, but we aren't breaking out how growth looks in the U.S., in terms of Ad Light versus subscription. JB, are we breaking that out?

We are not breaking that out, but I can confirm we are continuing to see healthy growth both sides on both products.

The only thing I may add is that advertising comparisons will be tougher in the second half of the year. Demand continues to be robust with no signs of a COVID setback, but we are entering a period of stronger comparisons with political advertising from last year's cycle.

Okay. Thanks.