Warner Bros. Discovery Inc (WBD) — Q4 2021 Earnings Call Transcript

Good morning and welcome to Discovery’s Q4 earnings call. With me today is David Zaslav, our President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, President and CEO of Discovery Streaming & International. 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 about 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, 2021, that we expect to file post this call and our subsequent filings made with the US Securities and Exchange Commission. And with that, I’m pleased to turn the call over to David.

Good morning, everyone, and thank you all for joining us today during this incredibly exciting time for our company. Our fourth quarter capped off a strong 2021 as we near the finish line of our transaction with AT&T to create the world's most dynamic media entertainment company, Warner Brothers Discovery. Once closed, Warner Brothers Discovery will stand on incredibly solid footing, creatively and financially. This is a real company, and we expect to deliver meaningful free cash flow over the near and long term. At Discovery standalone, we ended the year with $4 billion of cash and generated substantial free cash flow this year, over $2.4 billion, even after absorbing over $1 billion of losses from our Next Generation investments, and our free cash flow will grow meaningfully from here. As a company, when we come together, we will stand on firm footing and look to benefit from both a very balanced business model and from the cost synergy tailwinds we expect to result from our merger. This will support our expected reduction in gross leverage to three times or below within two years, starting from 4.5 times or lower net debt to EBITDA when we stand up the new company. Our vision for Warner Brothers Discovery is simple. We believe the companies with the most appealing and complete menu of IP and content will succeed. I believe Warner Brothers Discovery has the most attractive content in the business. From Batman, Superman, Wonder Woman, Harry Potter, Game of Thrones, Euphoria, 90 Day Fiancé, Hanna-Barbera, Looney Tunes, the Food Network, HGTV, Discovery, HBO, and great personalities like Martha, Chip and Joanna Gaines, Guy Fieri, the Property Brothers and Oprah, plus CNN, the premier global news network with real resources and news gathering services all over the world. Sports with Eurosport, the Olympics, NBA, NCAA March Madness, Major League Baseball, and the National Hockey League will make us a global leader in sports alongside a wealth of local content all over the world, content that we've produced and garnered for the last 20 plus years. Taken together, we will have a broad menu of content to super serve every demographic and family member who will never want to leave. Bringing all of our global content together, we will have what are the most compelling offerings in the marketplace and at a great value to customers. This was the premise and the vision John and I shared when we put this deal together nearly a year ago. Initially, we plan to see how all these existing and complementary content pieces fit together and how well our package of content nourishes and enriches consumers and what it does to churn and growth. From there, we can evaluate areas where we need to spend to enhance our offering. Together, we already spend aggressively across all demographics and genres and will have an even greater ability to do so as a merged company. And now we have the resources; we plan on being careful and judicious. Our goal is to compete with the leading streaming services, not to win the spending war. For breaking new franchises or reimagining and refreshing existing ones, we will have a truly scaled and diverse content engine. With IP ownership across a highly monetizable collection of IP. Perhaps most importantly, we are not solely dependent on one business model. As we reach across multiple platforms and touchpoints, every leg of the stool—from linear to direct to consumer to content production and monetization—will be utilized. As one of the leading content providers in the industry, Warner Brothers television is formidable. As a company, we will also be uniquely positioned to better serve advertisers and distributors globally. Said another way, we can monetize across any number of different cash registers. Consider that Warner Brothers television has over 100 active series being sold to over 20 platforms and outlets. It’s a content maker and content owner generating significant revenue, free cash flow and most importantly, optionality. There’s not a lot of content makers out there, certainly not at the scale and quality that Warner Brothers television is in the marketplace today, particularly at a time when the demand for quality television production has never been stronger. An important distinction when considering the asset mix of this company is the very real, balanced and complete nature of our operations. We have a lot of muscle memory from the Scripps merger, which enabled us to thoroughly reevaluate how we conduct our business. We took that opportunity to better align our management, operations, and processes during a time of pronounced industry disruption and change. I believe the same dynamic exists with the opportunity ahead for Warner Brothers Discovery. Turning briefly to the quarter, I'd like to call out a few highlights while Gunnar will take you through the details. First, on the advertising side, underlying demand across our networks and channels has been resilient. Overall, 2021 global advertising revenue increased 10% over 2020, with growth from both domestic and international segments. In fact, international segment advertising revenue increased 23% in 2021. Excluding the Summer Olympic Games, we finished the year on a strong note with growth across all regions. Here in the US, I'm pleased with our solid end to the year, despite a marketplace that has endured some headwinds from COVID and supply chain issues, helped in part by our outperformance against an industry-wide strong 2021-2022 upfront. At the same time, we've been very pleased with the results of our recent negotiations on distribution deals in the US. The team has done an excellent job continuing to demonstrate to affiliates that our portfolio is a great value, which has been reflected in our numbers this year. Within direct-to-consumer, discovery+ continues to perform very well. We ended the year with 22 million total subscribers, surpassing peak investment loss levels supported by consistent and continued strong KPIs, advertiser interest, and overall monetization efforts. As previously discussed, we've thoughtfully and tactically managed our rollout and will continue to do so while sharpening our focus and gaining perspective for the next leg of our direct-to-consumer journey with WarnerMedia and HBO. Worth noting, we achieved a significant milestone this past quarter by replatforming our discovery+ tech stack across Europe, bringing it onto a single platform consistent with the US. We achieved this important migration quite seamlessly, enabling a more feature-rich and personalized consumer experience. These efforts should ultimately drive better consumer engagement, higher retention, and lower churn, further supporting the positive trend we've enjoyed over the last few quarters. This replatforming also enables the rollout of an ad-lite tier to discovery+ in select international regions, something that was not contemplated when we launched at the end of 2020, but we expect will figure meaningfully into our eventual merged offering. The opportunity here is large and we look to best practices from the US. We expect to launch in the UK in March, with additional countries in Europe planned to follow thereafter. As part of our global content strategy, we believe premium entertainment, news, and sports offer an attractive service in many markets. We are excited about our innovative deal with BT in the UK, where, as we announced a few weeks ago, we are in final exclusive negotiations to create a rich, extensive portfolio of sports content in that very important UK market. We will combine our Eurosport UK portfolio with BT Sport, bringing together key matches from the Premier League and all of the UEFA Champions League, premiership rugby, Olympic Games, Cycling Grand Tours, and Grand Slam tennis. This will create a more compelling and simplified sports offering in the UK and Ireland while also advancing our broader strategy of bringing sports and entertainment to more consumers with discovery+. Then with Sports for a moment, and fresh off the Winter Games in Beijing, despite many challenges and obstacles, we were very pleased with the event marked by healthy growth and subscriber additions, streaming minutes, and total viewers across our combined portfolio. Though perhaps most importantly, building upon the momentum from the Summer Games in Japan, we enforced the value of delivering a much richer product experience that combines entertainment and sports in Europe, appealing to the whole household. This enabled us to bring new and different viewers to the Olympics, as well as to introduce more sports viewers to our entertainment content, which greatly improves retention and lifetime value. Lastly, before I turn it over to Gunnar, one closing thought on how soon we can complete the closing of our merger; this earnings could be our last as a standalone Discovery. For me personally, it has been the honor of a lifetime to run this very special company over the last 15 years alongside an extraordinary group of leaders, employees, and board members. Folks that I've gotten to work with and learn from, like John Malone, the Newhouse family, and the Myron family, as well as my great friend, John Hendricks, who sparked the idea that Discovery could change the world. Having accomplished so much and had such a blast along the way, I often remark that this job is such a blessing of a lifetime, and we’re all so lucky to be in this business and to do what we do. I could not be prouder of what we've achieved together, but recognize that our most exciting days and biggest tests are ahead of us. And we absolutely can't wait to share the next leg of this journey with all of you. With that, I'd like to turn it over to Gunnar.

Thank you, David. I'd like to start by echoing David's comments. This was indeed an exceptional year for Discovery, and one in which I believe we made significant strides across our financial, operational, and strategic priorities. Speaking to our financial accomplishments, I am proud of our continued focus on transformation and efficiency during continued disruption in our industry. Notwithstanding over $1 billion of losses from our investment initiatives in 2021, we finished the year with over $2.4 billion of free cash flow, representing a 64% conversion of AOIBDA. This is a true testament to both the resiliency of our core networks as well as the overall balance of our global portfolio of assets. Moreover, we ended the year with $4 billion of cash on our balance sheet and net leverage of 3.0 times, both of which have continued to improve thus far in 2022. Based on our current momentum, I remain very confident in our projected net leverage at closing of 4.5 times or better and reiterate that our long-term target leverage range for Warner Brothers Discovery remains 2.5 to 3 times, which we intend to achieve within 24 months from close, possibly sooner. Now turning to the quarter, let me briefly provide some color on Q4 results, where the underlying trends are more or less consistent with those of the last few quarters. In the US, Q4 advertising was up 5% year-over-year, largely driven by strong pricing in linear and further supported by continued traction in the ad-lite tier of discovery+. As I mentioned on our last call, we have seen hints of softness in the scatter market due to supply chain disruptions and some category softness around COVID. Visibility remains limited as supply chain issues persist, and we currently see low to mid-single digit growth in Q1. US distribution revenue increased 17%, helped by discovery+ and higher linear affiliate rates, more than offsetting declines in linear pay-TV subscriber numbers of around 4% for our fully distributed portfolio. Turning to International, which I will discuss on a constant currency basis: starting with advertising, momentum is quite a bit stronger than in the US, increasing a healthy 12% in the fourth quarter, benefiting from robust performance in all regions. We continue to enjoy pricing upside resulting from healthy demand across EMEA, particularly in the UK, Poland, and the Netherlands. While Latin America continues to recover nicely, helped by share gains in key markets like Mexico and overall healthy demand. We are also at the very early stages of rolling out an international ad-lite tier for discovery+—first in the UK and Ireland in March, with additional EMEA markets to follow, enabled by the International replatforming which David previously alluded to. We are enthusiastic about the incremental consumer-focused feature enhancements which we expect will drive better engagement, resulting in continued churn reduction and monetization upside. Distribution revenue increased 5% during Q4 as ongoing affiliate fee pressures in certain EMEA markets have been more than offset by growth in discovery+ subscribers, with strength in key markets like the UK, the Nordics, Poland, and Brazil. On the expense side, total Q4 operating expenses increased 9%, while revenues decreased 4%, helped in part by a more normalized sports schedule in Europe, and partially offset by continued investment in content for discovery+. SG&A increased 29% due to overall marketing spend supporting discovery+ subscriber growth and new market launches. Lastly, operating expenses in our core linear business decreased in the low single-digit range for the year, in line with our guidance. To that end, I am very proud of the efforts across the company to support continued efficiency and overall cost management. AOIBDA for the quarter was up 15% to over $1.1 billion, and was down only 8% for the year to $3.8 billion, which taken in the context of an incremental $600 million investment in NextGen initiatives and a roughly $200 million loss for the Olympics. I am extremely proud of our results. I do want to take a minute to call out both the criticality and resiliency of our core linear network business. We continue to invest in and support these important brands and franchises while at the same time looking to drive operational efficiency across the globe as we maximize their contribution to free cash flow and to fund our continued investments in direct-to-consumer. Now turning to some housekeeping items and a couple of items to consider for the quarter as you update your models. First, US other revenue was up $74 million during the quarter due to a non-recurring non-cash item which flowed 100% to AOIBDA, representing a positive $0.08 per share impact. Second, we recognized a $0.13 per share non-cash loss from the $15 billion of notional interest rate hedges implemented in the third quarter to mitigate interest rate risk for future debt issuances to finance the cash portion of the WarnerMedia transaction. As I mentioned on the last earnings call, we are required to report the changes in fair market value on our income statement, as the derivatives do not qualify as hedges for accounting purposes, which could result in some additional variability to our net income until the WarnerMedia transaction closes. Third, Group Nine signed an agreement to merge with Vox in December 2021. As a result of this transaction, which closed earlier this week, and the estimated value of our ownership in the new company, we recognized a $0.10 per share non-cash impairment charge. Finally, the impact of PPA amortization during Q4 was $0.51 per share. This is higher than in prior quarters as we reassessed the useful life and amortization method for all the purchase customer relationship intangibles. While the useful lives of these intangible assets did not change, we decided to take a more conservative position and accelerate amortization to better align with expected cash flow. As a result of this, our Q4 D&A expense increased by nearly $200 million. Adjusted for all of the above, EPS would have been $0.73 per diluted share. Our full-year effective book tax rate was 16%. Our cash tax rate was 25% for the year, excluding PPA amortization. For 2022, we expect our tax rate to be in the mid-20% range, while our cash tax rate is expected to be in the low to mid-20% range, excluding PPA for Discovery standalone. Based on our planned rates, we expect FX to have a roughly $90 million to $100 million negative year-over-year impact on revenues and a negative $5 million to $10 million impact on AOIBDA in 2022, inclusive of the existing hedges. A quick update on where we currently stand in the transaction process: we have already satisfied most of the conditions to close, including unconditional clearance from the European Commission, the expiration of the HSR waiting period, clearance from all other key international markets, and a favorable private letter ruling from the IRS for AT&T. We also filed our final merger proxy earlier this month and have scheduled our stockholder meeting for March 11. Following the vote, and assuming the deal is approved by our shareholders, this puts us on a clear track to close in early Q2. That will be a wonderful achievement that reflects our best case estimates from a year ago. I am encouraged by the continuing operating and financial momentum at Discovery, during what has undoubtedly been a hectic year. We could not be more excited to begin integrating the two companies as well as delivering the promises we have made to you, including $3 billion-plus of cost synergies and driving significant free cash flow to deleverage the company down to our target leverage range within 24 months. Having recently conducted high-level meetings across our respective companies, it’s fair to say that both the Discovery and Warner teams are eager to begin collaborating to build one of the most dynamic media entertainment companies in the world. Now with that, I'd like to turn the call back to the operator, and David, JB, and I will be happy to take your questions.

Given the new geopolitical risks from Russia, can you just remind us what percent of Discovery's revenue comes from Europe and Asia, or what it would be on a pro forma basis for Warner Bros Discovery? And whether you've seen any early pullback on advertising in the region, obviously understanding that the Olympics just wrapped up there, then have a separate one for Gunnar on the AMORT policy?

Okay. Go ahead, Gunnar or JB.

I could take it, Michael. It's an immaterial proportion of our financials. It's about a percent of profits that we're generating in this region here.

JB, if you could just comment more broadly.

I would say in the Ukrainian market itself, obviously, it's absolutely negligible is the short answer. In Russia specifically, as you may remember a couple of years ago, when the regulatory regime changed in the country, we were obligated to restructure our agreements to be represented by a local player. We did that to comply with local regulations. So for now, based on everything we've been able to study up until literally real time this morning, we don't see any impact, but we're going to continue to track it and see. And as Gunner said, even including the Russian market, it's still a very immaterial proportion concerning the total Discovery Company. Regarding the larger European footprint, for markets that are important to us, like Poland, or some of the Eastern European markets which are most likely to be affected, again, for the moment, we haven't seen any impact. We're pacing nicely for the first quarter, but that is a situation that is going to evolve and we will continue to monitor it.

Okay. And then for Gunner, just following up on the change in amortization policy. Can you discuss if you're also reexamining changing viewing behavior habits and how that might impact any of your content amortization included in EBITDA?

No, Michael. It was a review of our accounting methodology here. Remember, this is purchase price allocation that we took on with the acquisition of Scripps. Obviously, we review these on a regular basis, especially during the preparation for the upcoming WarnerMedia deal. As such, this is non-cash. It's what we paid for Scripps. I just generally like to take as conservative a position as possible here, and there is no benefit from having these intangibles on the balance sheet. What's going to happen is, as you saw a $200 million impact in the fourth quarter, again, we're not changing the amortization period; we're just frontloading the rate of amortization. This will increase the amortization of these positions for the next two or three years and then decrease the amortization in the outer years.

Just one point coming off of Gunner’s point about Scripps. I just wanted to mention that if you look at our company today and how we came together with Warner, none of that would have been possible, in my view, without the business that Ken Lowe built. And when I say built, I mean as a real entrepreneur who came up with the idea for those channels at a time when broadcasters were dominant; everyone thought a home channel wouldn't make sense, but home, food, the personalities, and understanding brand and culture made a fantastic business. When we came together, it really gave us tremendous strength and diversity in nonfiction. It also gave us more confidence to go to market with D+ and a much broader menu, and that transaction and opportunity to work with Ken has enriched the company and positioned us to be able to do the Warner deal.

Thanks, Robert, next question.

Great. Thank you.

Actually hold on, Mike. I should have— I didn't properly answer you, Robert. I didn't fully answer your question because you were also focused on content amortization. That's something we also obviously confirm on a quarterly basis, and there were no changes to these policies last year. So again, you've got the linear world and the potential further exploitation of content in the digital world. Those are sort of balancing each other out right now, so we haven't made any changes.

Thanks so much. David and Gunnar, would you just talk about your confidence level in the $14 billion EBITDA and $8 billion free cash flow guidance for 2023? And if that confidence has evolved at all and why. And then, I guess the follow-up to that is should we look at that level of guidance, $14 billion and $8 billion, as suggesting that you don’t see a need to ramp content spending rapidly, which a lot of folks are worried about. That looks like a guidance that would suggest you're just going to continue along the path that HBO already had planned for their content spending ramp. So any correlation between that guidance and your intentions regarding content spending would be helpful. Thank you.

Sure, let me start here. Number one, yes, we have full confidence in the guidance that we provided when we announced this deal. We're in an approval process here, so we have done some more work, but we are eager to get into the detailed planning of these synergies after closing. Everything we've learned so far has, if anything, given me more confidence in our ability to generate these numbers. When it comes to content investments, we've received that question a lot over the past couple of weeks, understandably given what's been going on in the ecosystem. A couple of things here: number one, we have in our numbers baked in a very significant increase in content spending and we have put zero synergy against that. Number two, we are currently spending at a peak level or at least at the highest level that we have seen in the history of this company. We spent more than $4 billion for content in 2021 at Discovery alone, and obviously also in the media side they've seen increases in spend. So we are definitely spending enough from my perspective. The key question is how much is going to be enough going forward. We have plenty of room in our business case. I will also say, as David said in his opening remarks here, it’s not about winning the spending war. Money doesn’t score goals. As the European soccer analogy would be, we will have a greatly complementary portfolio of content, focus areas between Discovery+ and HBO Max. In fact, we will be covering all four quadrants better than anyone else, and that could drive content efficiency that we haven't been able to achieve as standalone companies at Discovery+. We've invested in content in areas that are slightly outside our lane in order to appeal, and everybody noticed the efforts on the HBO Max side to get more female viewers, with investments that might not perfectly fit into the wheelhouse. So, I actually hope that we might be able to get away with a little less content, but we've certainly taken a conservative approach and put in a very significant room for increases in content spending. I don't know if David or JB would like to add anything.

Look, I think we start with the premise that the idea for this transaction was that we have a library as big as Netflix, with content that people love in the US, local content around the world, in the entertainment, nonfiction space and sports. When we bring that together with HBO and what I consider the best TV library in the world, including the motion picture library, the first question is how well does that perform? We have a very low churn product in the US, and our churn is improving in Europe as we make it broader. When we put these two together, I think it’s the broadest, most compelling offering of content available. It appeals to everyone from kids who are very young with Looney Tunes and Hanna-Barbera, to older consumers with Harry Potter, DC content and everything in between. We see that there's also a different viewing pattern between HBO Max and Discovery+; a lot of our content is viewed throughout the day. The first thing we ask is, how well do we do when we come together? What happens to churn, what happens to growth? Like I've said, we are a real company. What I mean by that is we're generating over $8 billion in free cash flow. We have plenty of money to spend; that already assumes that we will spend more on content. But we're not going to just spend blindly. The key to these platforms, which is true of free-to-air channels and cable channels, is that you spend enough to create an audience that wants to spend time with you and that they feel you're important. We’re going to be very careful about how we gauge our success, and I believe that we have a good chance of doing quite well. We also have very low-cost content, and we won't have to significantly increase investments, especially since our catalogue will be differentiated and compelling. Nonetheless, we do have the resources if we see that spending more will lead to growth and better economics, lowering churn and raising ARPU. We'll be very careful because we have a real company that's generating real value.

Thank you. I wonder if you can talk about—just remind us how you think these days of cost savings and synergies on Warner. Compare the difficulty and size of the opportunity versus those in the Scripps deal; anything changing there as you've gotten more into it? Thanks.

Warner—why don't you— we’ve been side by side on this for the last several months. The good news is that we've been digging in with Anne and the team, and we've been able to confirm a lot of what we thought. But why don't you, as the general here, just talk Philip through.

The short answer here is we’re fully aware of the fact that this is much larger, and it’s going to be much more complicated and complex than what we dealt with when we brought Scripps and Discovery together. That said, in all the work that we’ve done, I’ve actually gotten more excited about the opportunity. We had first very high-level meetings with WarnerMedia that have gone very well. Remember, a lot of the cost-saving will actually come from cost avoidance. We're running two completely separate direct-to-consumer technology stacks in marketing operations. We are spending roughly $6 billion for technology and marketing between HBO Max and discovery+. Clearly, once we have successfully migrated those technology stacks in Q1, there is a huge opportunity to reduce costs. Additionally, we anticipated very significant investment increases for both plans. One of those ramps will go away as well, that could easily make up for half of the total cost synergy potential here. Then we have the linear portfolios; both sides have a lot of experience. I encourage people to look back at the efficiency change when we combined Scripps and Discovery. There are straightforward opportunities that we could leverage. I also want to point out that we haven’t assumed any revenue synergy; the ability to come to market in the US with a broad content portfolio means we can service advertisers and distributors much more effectively.

The other point is that we haven't assumed any revenue synergy, and the ability to come to market with a broad bouquet of content means that we can service advertisers and distributors much more effectively.

Forgive me if I'm premature on this, but there have been many headlines about CNN Plus ramping up; seems like there’s business model overlap with Discovery+. Anything you can add about that?

We will, in the near term, sit down to have a real business plan discussion with the people at CNN and CNN+. We haven't had that yet; we haven't seen it. I've been watching a lot of CNN. This situation highlights the disparity between a new service with significant resources globally and news gathering capabilities, with the largest group of global journalists of any media company, maybe with the exception of the BBC. CNN is on the ground in dangerous places, risking their lives to provide the truth, essential for assessing risks in the world. It’s a proud moment to see what they’re capable of. However, since this deal hasn't closed yet, CNN is being run by AT&T; we’re starting to gather details on their current activities.

David, I just want to add one significant point regarding synergies. The Warner International basic channels business is about ten times larger in revenue than what Scripps was. I think the opportunity on the channels' integration internationally is much more significant than it was in the Scripps business.

Thank you. Good morning, everyone. Gunnar, you are on the cusp of closing the deal and the hard part is obviously in front of you. Given the changes you need to implement, where should we expect to see early results in revenue and costs? Maybe specifically the upfront in May? And it seems you'll close before then. The old Time Warner or Warner Bros traditionally had silos between entertainment, news, and sports. Do you expect to go to market with all segments under one Salesforce? If yes, what are the pros and cons of doing that? And my follow-up? I'll just ask now: you called out the Olympic performance, which is clearly very different than the US experience. Can you talk a little bit about the lessons learned from the first two Olympics and expectations for Paris in ’24?

Sure. Well, first, we've been focusing really on cost. After we close, we'll have a chance to think about revenue opportunities. But our number one priority has been focusing on cost and analyzing opportunities within synergies that reflect the $3 billion cost savings potential. With regard to the Olympics, we have focused very intensely throughout Europe with all both sports in really driving local recognition of athletes. Who are the local athletes? What’s at stake for them? Where did they come from? Why do you care? We learned over the years with our three sports channels and direct-to-consumer business that it’s not just a love of the sport, it’s a love of the athletes. We want consumers to be engaged with the stories behind the athletes. Our goal was to ensure that if you went down a main street in any country, you'd be able to name between five to ten athletes you'd look forward to seeing in the Olympics. I think that effort was instrumental in driving viewership across Europe. JB?

Yes, look, I think, Jessica, we've learned several key things. As David said, the production side has emphasized content storytelling on local heroes and athletes. We've also recognized that in this digital and social age, people want more authentic representations of the athletes’ lives. Thus, we've introduced elements like family cams to showcase how their families are rooting for them back home during the games. We’re committed to making our coverage a more intimate and authentic experience surrounding these athletes and their support system. Lastly, we've continued investing in the best set of experts in terms of on-air talent. Our branding focuses on providing the best insight, often with Olympians themselves, enhancing our viewer’s connection with the content. We will continue to leverage innovative technology to present the games uniquely and engagingly. We are incredibly proud of what our team managed during challenging circumstances and are thrilled that our linear ratings remained comparable to what we saw four years ago, despite the complex situations that arose.

Gunnar…

Jessica was asking about a little more question. I think you've covered a lot, but any other thoughts?

No, I mean, the only thing I would add just to your point about timing is that we want to hit the ground running. We have set up integration management offices, both on the WarnerMedia side and the Discovery side. We have full teams in place and working groups, etc. But that said, we're still operating as two independent companies right now with very limited interaction regarding actual savings measures. With that in mind, I would want you to expect an initial wave of savings after closing, primarily among straightforward, quick wins. We'll then get to work on detailing the longer-term structure and setup; this is why we’ve focused our communication on 2023 as the year for full synergy capture.

Our objective is to close the deal and implement these work streams on cost. Then, we'll examine the opportunity to serve advertisers more effectively. We hope to be closed before the upfront. It looks like that will probably be the case, and then we'll be able to formulate a strategy for the upfront.

Two questions for me. First, David, you spoke about Warner Bros TV. Historically, that's been a somewhat unique business and its size, but also selling outside of the company. You referenced that being something you sort of expect going forward, and in recent times, it feels like companies are trying to pull more content back in. Perhaps in situations where they've sold externally, they've been disappointed with that decision. So maybe you just talk about the balance there, given the size of the business, but also the interest in fueling your own platform. And a second question, maybe for Gunnar—is really the long-term margin structure for the business and thinking about the streaming industry more broadly. The guidance that you guys have given sort of implies a high 20% EBITDA margin, which is below the historical cable business, but definitely at the high end of the streaming business. So, how do you see that converging over time, but also when thinking about what a scale streaming business looks like globally, what does its margin structure look like in the long run? Thanks, guys.

Thanks, Michael. I've been enviously watching Warner Bros TV having spent 18 years at NBC's must-see TV. Jack Welch would remind the heads of entertainment that Warner Bros was key to their success. The business that the Channing is running now is generating significant revenue. It serves two purposes: it is the best and largest producer of quality TV content globally. We partnered with Liberty Global on the O3 business, which includes 35 production companies. This business is now run better, as there are multiple bidders for quality content. Warner Bros TV is a compelling business in a market with few makers. Even smaller makers are transitioning to making content solely for themselves. I see that business offering tremendous optionality and something rare in producing quality content. We can generate more content for HBO Max and make money by supplying content to Apple or other service providers. We will figure it out, but we have a big production entity here capable of making money in an environment with high demand for quality content. This is part of our balanced approach as a company.

And on the margin side, Mike. A couple of points here. If you take a step back and look at long-term projections on a ten-year horizon, you know, it’s reasonable to assume slightly declining margins on the linear side. Meanwhile, we've announced that DTC companies are expected to reach their peak investment point soon. Discovery+, as you know, peaked in 2021 from an investment loss perspective, and HBO Max is planned to peak in 2022. Therefore, there will be significant margin improvement in those businesses. David outlined macro tailwinds for the TV studio, which should also be a positive aspect. Taking these underlying trends into account, factoring in a mixed change with DTC, which is obviously growing significantly faster gives insight into how we achieve the margin levels projected in our filings. We said when we launched Discovery+ that we were confident in reaching a 20% margin at scale. That’s roughly where Netflix is today, and I believe we will exceed that prospective margin given we’re uniquely positioned. We’re going to have better opportunities at monetizing investments across platforms; we're uniquely operationally equipped to achieve these goals.

One of Discovery's great strengths has been that we are a free cash flow machine, laser-focused on that metric. Looking at 2023 and that $8 billion figure gives us strength, but we're not going to pour everything into the direct-to-consumer business. There’s a sensible level of investment that makes sense for the business. We’re determined to monetize our various IPs to enhance the overall value of the company, emphasizing shareholder value, and uniquely, we can operate globally in ways that few companies can.

Two separate questions, if I could, please. One, on the linear advertising side, your trends and advertising are significantly different from the company that you’re merging with. I was hoping to understand your plans for turning around that portion. This goes back to some of Jessica's questions, but how should we think about Discovery's linear advertising growth, particularly in the US for 2022? Then separately on streaming, could you talk about churn for Discovery Plus? How do you measure it? How should we think about monthly churn rates? What should we be looking for in churn on that service going forward, particularly as you layer in HBO content? Thanks.

We can start with the second one, Brandon. On Discovery Plus churn numbers, I think we don't disclose specific numbers, but I can tell you this: David has alluded to it— I'm trying to separate the US and international. In the US, we’ve seen that, compared to the best in class in the market, we’re not quite there yet but are looking very competitive among top performers. This is only twelve months after launching, and our product is shaping into something refined, considering both engagement and retention capabilities. Historically, on the international side, we’ve faced more challenges—I’ll be candid. Part of that was our platform lacking sophistication, as it was based on a legacy system predating Discovery Plus in the US. The re-platforming we completed at the end of last year has led us to lower churn, starting from our best quarterly numbers. We think part of that is driven by re-establishing advanced personalization features in International. We're optimistic about churn trends improving as new product features roll out.

The only thing I would add is that over the years, we’ve gone to market with the expectation of building superfan niche businesses. Our experience shows that when we add to our offering, the broader the scope, the lower the churn, and the more satisfied consumers are. Thus, we believe bringing everything together will create a broad offering that drives growth, lower churn, and better customer satisfaction. In Europe, we have a superior position as a leading broadcaster, showcasing a complete range of entertainment, nonfiction, and sport. In those cases, our churn numbers are encouraging, which supports our optimistic outlook.

On the advertising side, you'll appreciate we can't disclose specific plans for the combined company. However, I do want to provide a few general insights and one specific deal point. One, there’s no doubt that ratings across the industry are under pressure, which means there's less inventory. Nevertheless, we've continued to grow for a number of reasons, and I see every reason to believe we’ll continue our growth trajectory. Firstly, we've always been under-monetized in our networks; David has pointed this out for years. We're finally seeing traction on pricing as the market corrects. We're also now using dynamic ad insertion, and we’re seeing positive results there. Secondly, when we shift to digital, we’re able to achieve CPMs that can be 3x higher now due to our expanded reach among demographics and improved targeting capabilities. Therefore, there's significant monetization potential in our traditional business. Regarding specific deals, the discovery-scripps combination led to improved ratings as we were able to leverage our combined content. After that merger, ratings trends enhanced significantly. I believe we can replicate this trend by combining our ranges.

So you guys have such a great track record in international markets. I just had an international DTC question: a year ago, if you asked the buy side how big the opportunity was, they might say 800 million or a billion households. If you ask now, they approximate a number that’s a third of that due to some of the bigger players experiencing decelerating ad revenues. I know you have sports, news, and a wide array of content, but what's your view of what that number is? What will it take to deepen penetration outside of the US? Thanks.

I think there are certain numbers of viewers willing to pay $14 or $15 for television. You can model it out country by country; different cultures entail varied willingness to pay for content. We'll have an ad-free product and, concurrently, a lower-cost AdLite offering. How does the market shift for a cheaper product? When we analyze our discovery+ and HBO Max performances, they show promising narratives in terms of reach. Our unique selling proposition is the capability to offer a diverse and rich library that many of our competitors lack. Our ambition remains to capitalize on every opportunity, reach every audience segment, with tailored offerings in line with their preferences. Moreover, we possess significant content diversity, languages, and options—something few can match. We strive to deliver everyone from premium subscriptions to free content viewers; further down the line, we could have an advertiser-supported model available for those not willing to pay, enhancing our reach immensely.

David's vision is not theoretical. It's the same strategy that allowed us to successfully enter free-to-air markets across Europe, where traditional pay-TV penetration was around 20-30%. In some regions, we created a substantial audience segment while achieving margins higher than 20% in free-to-air environments. This model could transition to digital, representing another audience segment we want to target for growth.

We had the broadcast model, and we didn't have news or sports. Initially, we had not much original content. For example, in Italy, we hosted the number one broadcast channel for women; within six months of launching, that was de minimis.

All right, Jason. If I may add one point, achieving sustainable long-term growth might require acknowledging that international markets have higher ARPUs, but our international subscriber count will ultimately impact our revenue. Additionally, we can tap into a far broader portion of the population. In many traditional pay ecosystems, market access is limited to the top 15, 20%, or 25% of potential customers. This is our ongoing advantage in the model.

Good morning, and thanks for taking the questions. David, you mentioned in your prepared remarks that your goal is to compete against leading streaming services and not to win the spending war. As you know, a lot of the leading streaming services are ramping their spending levels. I think Gunnar hinted at the fact that there may be content spending deficiencies compared to your previous expectations. So, I don’t want to belabor the point, but it’s just on the mind of so many investors. I’d love your perspectives on what gives you confidence that the DTC spend levels embedded in your targets remain appropriate, as the landscape becomes increasingly competitive. At the core, how do you prioritize achieving that $14 billion in EBITDA and driving significant free cash flow versus flexibility for additional investments in streaming to better position the company to become a long-term leader in the space? Thanks.

Our perspective on this deal hinges on the understanding that we might not fully know the required efforts until we see how it performs. We are invested in competing against Disney and Netflix, yet we’re different companies. Disney has a strong, quintessential group, and Netflix does a remarkable job appealing broadly. We offer a compelling roster of identifiable IP that is much broader than Disney's. If you observe what Casey is doing with HBO, including Euphoria, Succession, and Gilded Age, it’s unclear if more scripted content would lead to better engagement. For example, if you questioned the viability of enhancing our offer with additional 400 hours of content for Food Network, you might discover marginal returns from that investment. Euphoria brings viewers not only to HBO but also to other channels in our offering, reinforcing the idea that diversity in our library is vital. This balanced approach allows us greater synergies. Given our depth, we are confident but will be cautious and strategic in our decisions, and while we are not hesitant to invest more if it shows promise, we won't act impulsively. Our job is to build a sustainable business model that generates consistent value.

The priority is to make well-informed decisions and consider every opportunity. We will make those decisions favoring long-term growth and sustainable value for the firm. That's all I can add; we’ll evaluate every path forward.