Warner Bros. Discovery Inc (WBD) — Q4 2022 Earnings Call Transcript

Good afternoon, and welcome to Warner Bros. Discovery's Q4 Earnings Call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects, and financial performance. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company's filings with the U.S. Securities and Exchange Commission, including, but not limited to, the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q4 earnings release, trending schedule, and accompanying slide deck is available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

Hello, everyone, and thank you for joining us. We've been hard at work since our last call and look forward to updating you on our progress. First, let me say, this promises to be a very exciting year for our company. We took bold, decisive action over the last 10 months, and the bulk of our restructuring is behind us. We have full command and control of our business, and we are one company now. We have a fantastic leadership team moving us forward, everyone rowing in the same direction. Together, we are focused on making our businesses better and stronger. Last year was a year of restructuring. 2023 will be a year of building, and off we go. In today's increasingly dynamic and crowded media environment, the best hand has great storytelling IP, brilliant creatives, a full slate of production and distribution capabilities, and a broad global reach that stretches across premium, pay TV, free-to-air, theatrical, streaming, licensing, and gaming, the entirety of the ecosystem. That is exactly the hand that we have, and we intend to play it decisively with a focus on free cash flow and an eye towards sustainable future growth. Warner Bros. Discovery is a storytelling company, and we are fortunate to have a huge share of the most beloved and globally recognized storytelling IP in the world, including Harry Potter, Game of Thrones, Superman, Batman, and Lord of the Rings. We intend to take full advantage of these one-of-a-kind franchises across our various platforms. In all that we do, we are guided by three strategic pillars. We want to tell the best stories, share them with the broadest audience possible, and we do that by working together as one team, one company. The decisions we've made and the strategies we've set in motion 10 months ago have created a solid foundation, and we're starting to see strong momentum. It's working. In an increasingly challenging environment, we were able to deliver over $3.3 billion of reported free cash flow in 2022, a healthy conversion, notwithstanding significant merger and integration-related expenses. Gunnar and the team are laser-focused on driving transformation throughout the organization, supporting our ability to generate real free cash flow. Gunnar will take you through all of the financials in our outlook, but I'm very pleased that we see our net leverage clearly below 4x by the end of this year. It's working. On direct-to-consumer, we are making meaningful progress on our goal to achieve real profitability in streaming, a key and powerful segment of our company. We brought our losses down considerably and are even more confident in the financial targets we laid out a few quarters ago. We reduced EBITDA losses by $500 million year-over-year to $200 million in Q4, supported by 1.1 million net subscriber additions in the quarter. Most importantly, we saw improvement across key KPIs. Gunnar will elaborate further, but I'm pleased with the trend line we see in Q1, particularly as we manage towards close to breakeven segment EBITDA in the quarter. Consistent with what we told you last August, we are getting ready to launch our combined streaming service here in the U.S. in a few months, with Latin America to follow later this year and markets in EMEA and APAC in '24. The product will offer compelling content for every member of the household. SVOD and ad-lite tiers and a significantly enhanced product platform are being developed to drive better performance, improved user experience, and stronger engagement. We're excited about the upcoming launch of the product and look forward to sharing more details at a press event on April 12. In the meantime, we completed a new distribution agreement that puts HBO Max back on Amazon Prime Video Channels. On the traditional side, we renewed agreements representing 30% of our U.S. affiliate revenues. We also signed FAST content deals with Roku and Tubi, adding to these popular platforms hundreds of our TV shows and movies while maximizing the reach and overall value of our content. Our new studio heads are hard at work putting their unmatched creative stamp on our future slate. This year, we celebrate the storied Warner Bros. Studios' 100th anniversary with a commitment to telling quality, diverse stories with the power to entertain and inspire, and when we are at our best, impact or even change the culture. I'm thrilled to announce that Mike and Pam signed a deal to make multiple Lord of the Rings movies. Lord of the Rings is one of the most iconic storytelling franchises of all time, and we're so excited. Stay tuned for more to come on this front. A few weeks ago, James and Peter rolled out Phase I of their highly anticipated multiyear plan for DC Studios across film, television, and animation with 5 films and 5 television series already in the works. The new era for DC under a single creative vision is in full swing, and we are especially eager to thrill fans with new Superman and Batman movies in 2025. There hasn't been a stand-alone Superman movie in a decade, and we're excited to tell even more of those stories. We are also excited for the release of 4 DC films this year, starting with Shazam in 2 weeks, followed by The Flash, which James Gunn called one of the greatest superhero movies ever made, a masterpiece. I saw it and loved it. I can't wait for The Flash to hit the theaters in June. We're thrilled by what we're seeing coming out of our games business, which represents a core part of our overall strategy. With the successful launch of Hogwarts Legacy 2 weeks ago, we reimagined one of the biggest global franchises in the world. The game was one of the most highly anticipated of 2023. Consistent with our commitment to great storytelling, we delayed the launch to get it right, and the response from consumers has been overwhelmingly positive. We've already seen more than $850 million in retail sales, and we still have more platforms launching over the next few months. There's lots more to come, including the highly anticipated Mortal Kombat 12 and Suicide Squad - Kill The Justice League, both set for release this year with ambitious launch projections. We have a great hand, and we're doing a lot right. That said, there's still more that we need to get right, and we are hard at work. To that end, linear ad sales is a top priority at the moment, particularly as we balance both cyclical headwinds and ongoing secular challenges, much of which we've dealt with for the last several years. It was a heavy lift to bring two teams together, notwithstanding the economy being what it was. We contend with recent share shifts away from our portfolio during the NFL and College Football season and the World Cup. We're still in the early stages of bringing this comprehensive portfolio together and harnessing all that it can deliver. I'm confident that we will get there, particularly with some of the operational and content-driven initiatives implemented by Kathleen Finch and her team. They have great plans to revitalize the networks and have begun to use our exceptional library of film and television content in ways that will benefit our linear and cable networks. Our U.S. networks average 30% of all nightly cable viewers in the key 25 to 54 demographic, with times when our share is significantly higher with marquee events, such as March Madness, the MLB Postseason, and the NBA playoffs. On the news side, we are fighting hard and making real progress. CNN stands as a premier global news organization, and we want to be the place for fact-based reporting and thoughtful discourse that is broader than politics and sports. We are already seeing a more inclusive range of voices and viewpoints, as demonstrated last month when over 70 Republicans came on our air during their Congressional speaker election process, a first in a very long time. We're committed to advancing this balanced strategy. Chris Licht and the team are focused on building an asset for the long term across cable and digital that is worthy of that great global brand. We must get it right. Nowhere is this more important, and it isn't going to happen overnight, but I believe we are on the right path. The ongoing enterprise-wide efforts are helping to turn the flywheel and grow and improve our businesses, and we see so much opportunity ahead. We continue to be the place creators are choosing to bring their visions to life. In recent weeks, we signed new deals with a number of the most prolific and celebrated creatives in the industry, including Greg Berlanti, Baz Luhrmann, M. Night Shyamalan, Akiva Goldsman, and Zach Cregger. Warner Bros. Television Group has more than 110 shows currently in production across our own platforms as well as third-party broadcast, cable, and streaming outlets, including Emmy Winners, Ted Lasso and Abbott Elementary, Young Sheldon, network TV's number one comedy, The Voice, the number one most-watched unscripted show on network TV, and the newest hits, Night Court on NBC and Shrinking on Apple TV. I believe Warner Bros. TV is the greatest quality maker of content in the world. We're committed to creating shows that people really want to watch, and they also want to experience them with other people. That is exactly what we see happening at HBO. HBO has never been stronger and is firing on all cylinders behind the recent successes of HBO Originals, Euphoria, House of the Dragon, White Lotus, and our newest mega hit, The Last Of Us. These shows have averaged as many as 20 million viewers in episodes with strong week-over-week growth. For example, The Last Of Us grew its Sunday premiere night viewership by about 1 million with each episode over the first 4 weeks. After just 5 weeks, an astounding 35 million people have watched episode 1. These are huge numbers, particularly in today's day and age of binge viewing, when there is so much content to choose from. It all stems from great storytelling. Again, creating shows that people want to watch reminds me of my time at NBC when Thursday Night was must-see TV. Those shows had a supersized effect on people and culture. Back then, you had to watch the show on Thursday night. Today, with direct-to-consumer, more and more people are joining the party. That's the power of streaming. HBO is streaming's new must-see TV with all of its cultural impact and excitement. Every week, a new episode comes out, and by the time the next one airs a week later, tens of millions of people have watched the last episode. Social media explodes, and people are calling their family and friends to talk about what they saw. This phenomenon can go for eight, 10-plus weeks for each series. That's the power of curation. We believe that when you have content that is so good that it hits the mark, the best way to drive interest and engagement is not by dropping the entire season on a platform all at once but by allowing the buzz and anticipation to build over time. It's the same principle with theatrical releases; the perceived value of content increases when there's great expectancy and excitement. People want to be part of something. When you tell them a great story and they get to experience it with others, either in a packed theater or on a Sunday night, it really is magic. At Warner Bros. Discovery, we believe we have the strongest hand in the industry, with the most complete portfolio of assets and globally renowned franchises, personalities, and storytelling IP across sports, news, nonfiction, and entertainment. We have an exceptional leadership team aligned across a common set of strategic, operational, and financial goals. We are the largest maker and seller of content in the world. While we've got lots more to do, we're increasingly seeing positive traction and strong proof points. For us, 2023 is a year of building. We are more confident than ever that we have the right strategy to be successful and ultimately achieve our goal of being the greatest media and entertainment company in the world. With that, I'll turn it over to Gunnar, and he'll walk you through the financials for the quarter.

Thank you, David. The fourth quarter marked the end of a first and very defining chapter for Warner Bros. Discovery in which we took pivotal initial steps. Among them, the integration and repositioning of our global finance organization through which we implemented initiatives to drive efficiency and better support the company's long-term sustainable growth. We've accomplished a significant amount in 2022, and I'd like to take this opportunity to thank the entire finance team for their persistence and resolve in working through these very difficult but necessary first steps, resulting in greater command, control, and precision across the enterprise, laying the foundation on which we are positioning the company. This is in part a function of a successfully executed synergy program and ongoing continuous improvement efforts. With respect to these initiatives, we are working on a total potential opportunity of $5 billion over the next few years. That is what we're tracking in our system today—specific initiatives with associated direct financial impact, responsible owners, and detailed milestone plans. Naturally, and as I have said before, not all of these initiatives will come to fruition or be realized to the full extent, but this represents a significant pipeline for us as components of both near-term cost out and longer-term continuous improvement. To that end, we are now confident in a path to at least $4 billion of savings, largely addressable through 2024, representing an increase of $500 million over our prior estimate. Through the end of 2022, we've already realized over $1 billion of synergy, inclusive of a couple of hundred million dollars of course-corrective measures that we undertook early after launching Warner Bros. Discovery in April last year. We are laser-focused on delivering against our high-level strategic, operational, and financial targets, and the three pillars that comprise our core principles. As we look to 2023, my near-term key financial priorities remain: number one, delivering against our synergy and transformation targets where we are managing towards an incremental $2 billion of cost capture in 2023 and the larger opportunity I mentioned previously. Number two, partnering with our business leaders to embrace a more rigorous analytical framework through which capital allocation decisions will be viewed, particularly as we refine how our content is monetized and windowed. Echoing some of what David said, the leadership team is aligned on strategic decision-making that benefits the company as a whole versus one segment or another and is incentivized as such. I believe we've barely begun to scratch the surface in terms of the potential here, and I'm excited about the benefits as this cascades throughout the organization. Number three, evaluating capital allocation opportunities with rigor, so we can both achieve near-term efficiency and enhance long-term asset value and growth. Number four, driving overall efficiency and free cash flow conversion towards our near-term goal of 1/3 to 1/2 conversion of adjusted EBITDA with longer-term upside towards our 60% goal. Naturally, we are laser-focused on deleveraging the balance sheet, where I see net leverage very comfortably inside of 4x by the end of 2023 and reiterate our prior guidance to be within the investment-grade range by mid-2024 and within our gross leverage target of 2.5x to 3x by the end of 2024. I am proud of what we achieved in 2022 against the targets we set out in the summer and against an increasingly challenging environment in the second half of the year. I am proud of the momentum we have built exiting the year. Turning to the quarter, I'd like to quickly take you through some of the puts and takes impacting performance. Given we're still in the first year following the closing of our acquisition, I will discuss the P&L impact on a pro forma ex-FX basis. Starting with the Studio segment, as expected, performance was negatively impacted by lower TV licensing revenues against a tough comp last year, something we will face again in the first quarter of 2023. Games and Home Entertainment faced difficult year-over-year comps as well due to last year's COVID-induced tailwind for library content. In addition to less activity in home entertainment, given the leaner theatrical release schedule in 2022, which was a result of deliberate decisions we made about specific titles and overall release dates. Partially offsetting revenue headwinds were lower content expenses, distribution fees, and marketing costs. Looking ahead within the Studio, 2023 will be a pivotal year, particularly behind our larger and broader release slates at both Warner Bros. Pictures and DC, not to mention a fantastic start with Hogwarts Legacy on the game side. Turning to Networks, revenue decreased 6% as global advertising revenues declined 14% and distribution revenues decreased 2%. Adjusted EBITDA decreased 7% as revenue declines were partially offset by lower content expenses as well as lower personnel and marketing costs, in part reflecting our cost synergy efforts. Clearly, as we've pointed out, a key risk since the summer, underlying advertising trends, particularly in the U.S., have continued to soften through the fourth quarter, and that was further exacerbated by general entertainment audience declines. While visibility remains limited, we see revenue trends modestly improving sequentially in certain pockets. While this is indeed encouraging, we are hesitant to forecast any meaningful near-term revenue improvement. International markets continue to perform relatively better; stronger markets such as Poland and Italy were offset by weaknesses in the UK, Nordics, and certain Latin American countries. While we are comping the Winter Olympic Games in Q1, which we expect will account for roughly a 100 basis point headwind to our global advertising growth rate, we see underlying international trends modestly improving. Distribution revenues on the whole were impacted primarily by subscriber declines in the U.S. and lower affiliate rates in certain European countries, while larger contractual rate increases in the U.S. and premium sports packages in Latin America helped offset part of this impact. Importantly, we successfully completed affiliate renegotiations, which accounted for more than 30% of U.S. distribution revenues and which brought our portfolio together coterminously. I'm especially happy about the development in our D2C segment, where we delivered a marked improvement across a number of key operational KPIs leading to a healthy sequential improvement in financial performance. Moreover, the exit rate coming out of the fourth quarter lends confidence in continued very strong financial performance thus far in Q1 and into our soon-to-be relaunched D2C offering. Casey and the team continue to fuel critically acclaimed, globally resonant content, driving improvements in engagement and churn, setting up a tailwind into the relaunch. Q4 revenue growth of 6% against the 12% decrease in combined operating expenses led to a significantly reduced EBITDA loss of roughly $200 million, a $500-plus million improvement year-over-year, notwithstanding a largely content-driven 6% increase in the cost of revenue. Global core subscribers increased 1.1 million sequentially and 10 million year-on-year, while global ARPU increased modestly to $7.58. This doesn't yet reflect the $1 price increase on the ad-free retail tier in the U.S. implemented in January, which has been digested quite well. Moreover, we're analyzing our pricing strategy in key international markets, particularly in Latin America, where we believe our service has significant pricing upside. Based on the traction we are seeing across the broad spectrum of operational and financial KPIs, we expect segment EBITDA to be more or less breakeven in Q1, which implies another $500 million improvement year-over-year, roughly in line with the improvement seen in Q4. Naturally, our domestic relaunch of the combined product offering in the spring will result in a sequential step-up in P&L investments in Q2 behind a requisite increase in marketing spend support and premier content launches. However, we remain enthused about the trend line here, and I have greater and greater confidence in our ability to achieve our long-term segment targets of breakeven in the U.S. in 2024 and $1 billion of profitability in 2025 globally. We continue to track above our internal plans. Turning to consolidated results and free cash flow: Q4 revenues decreased 9% year-over-year, while adjusted EBITDA decreased 2%, helped by a reduction in consolidated SG&A by 22%, a bit more than we guided to. Currency was an approximate $100 million headwind to EBITDA for the quarter and nearly a $200 million headwind for the full year. A year-over-year increase in corporate expenses was due to a number of factors, almost exclusively related to external market factors, such as an incremental $120 million related to underlying rates on our securitization facility. We generated $2.5 billion of free cash flow in Q4, bringing the reported full-year free cash flow to $3.3 billion. Note that merger and integration-related cash costs totaled nearly $150 million in Q4 and nearly $800 million for the year, in addition to a near $350 million headwind from securitization and factoring since the closing of the deal in early April. The sequential improvement in Q4 free cash flow versus Q3 was the result of greater EBITDA, the timing of interest payments on acquisition debt, and some early improvements from working capital initiatives. We repaid $1 billion of debt during Q4, bringing the total debt repaid since the closing of the transaction to $7 billion, and we ended the quarter with $49.5 billion in gross debt and nearly $4 billion of cash on hand, implying net leverage just below 5x. Turning to the total company EBITDA outlook, reiterating my earlier point, I'm pleased with where we ended the year and encouraged with our ability to balance choppy macro tides with success in repositioning the company for future growth. I remain optimistic about the range of potential outcomes in 2023 and beyond. These outcomes will reflect an incremental $2 billion of synergy and transformation efficiency capture, while additional factors to consider include positive revenue inflection in D2C, the broader release slate at Warner Bros. Pictures and Games, balanced by cyclical advertising headwinds. We expect 2023 pro forma adjusted EBITDA to be in the low to mid $11 billion range, representing growth of low to mid-20% against pro forma adjusted EBITDA of $9.2 billion in 2022. We continue to expect to convert 1/3 to half of EBITDA into free cash flow, as I stated earlier, with the key determinants and drivers of growth being the magnitude of EBITDA, net cash content spend, the impact of working capital initiatives, and the timing and magnitude of a trend change in the advertising market. We do expect the cash cost to achieve synergy and transformation efforts will be around the higher end of our $1 billion to $1.5 billion guidance given the expanded synergy target, some of which will possibly hit in 2024. With respect to the cadence of free cash flow, as is historically the case for both legacy Discovery and WarnerMedia, Q1 free cash flow will represent the low point for the year given the timing of sports rights payments, content outlays, and cash interest payments on a large portion of the acquisition debt. Accordingly, we expect free cash flow in the first quarter to be negative. The long-term earnings and free cash flow generation potential of this company are stronger than ever, particularly after having taken some courageous and crucial first steps this past year. We are committed to continue executing our strategic initiatives to drive top-line performance, and with much repositioning behind us, we are beginning to fully lean into the opportunities ahead of us. As always, we are not managing this company for short-term financial performance but rather for the next 100 years of this vibrant creative organization in mind. With that, I'd now like to turn it back to the operator, and David, JB, and I will take your questions.

David, as you mentioned, 2022 was a year of significant challenges across all divisions, including film, advertising, and CNN, along with macroeconomic issues and direct-to-consumer dynamics. Looking ahead to 2023, Gunnar highlighted some potential positive factors, but it appears you're projecting a decline from nearly $12 billion in EBITDA to perhaps low to mid-$11 billion. Can you elaborate on these assumptions? While you still face macro challenges, what are the potential upsides that you haven't discussed much? Additionally, regarding balance sheet improvement, which is promising, does this involve any consideration of asset sales, particularly non-strategic ones? Given the hidden assets within the company, what are your thoughts on this?

Thank you, Jessica. Let me start with the second question. The guidance does not include any asset sales. There are some opportunities that I'm looking at below deck, as we say, but none of that would be baked into this leverage guidance. And on the 2023 outlook, look, it's early in the year. There are a number of uncertainties, as you wouldn't be surprised to hear. I'm glad that we put out some targets in the summer of last year. We were able to hit those targets. We're putting these targets for 2023 out with the same mindset that we want to hit or outperform that guidance. We've gone through a couple of the puts and takes here. The biggest unknown continues to be in the ad sales environment. We have a lot of points to be very excited about. We're releasing 12 films and 6 games. One of them is off to a very good start. A lot to be looking forward to. We're excited about JB's product relaunch in the second quarter, but those are uncertain factors, and it's early in the year. I'm not taking anything off the table here, but I just want to be realistic about what we're seeing today.

And we hit this year with a full leadership team in place. We met with 186 of the top leaders for a week in early January. This is one team now. Everybody has a strategic focus on improving free cash flow and market share for each of the businesses. We have command and control of each of the businesses. I think our diversity— we have all these different assets that are different. Some are advertiser-driven; the gaming business is all consumer product driven. I think that diversity is a strength.

Appreciate all the information you just shared. I'd like to ask about advertising trends you're seeing and maybe kind of advance this discussion a bit more. Really trying to understand how much of the ad impact that you're seeing is coming from the macro environment? How much do you feel like is more reflective of underlying trends that just have to do with ratings declines or cord-cutting? If you could share your view on those two impacts, that would be very helpful. And my second question is about this pending relaunch MAX product. Is there any of your content that's definitely off the table to be included in that service? And so I think of the investments that you make in live sports content on Turner and live content on CNN. Are those types of things definitely on the table or are they structurally not able to be included in the service? Or is that something that might fuel that service?

Let me start with the second. In addition to all of our entertainment and nonfiction, we do have all of our news and sports. That gives us real optionality in terms of nourishing audience for growth, reducing churn, and overall price value. We'll do a full presentation on April 12 that will lay out this significantly improved product, the launch, and what will be on it. J.B., anything to add to that?

No. I think the focus right now is obviously continuing to expand the entertainment offering. We believe the complementary HBO Max and Discovery+ entertainment offering will be a major step forward for consumers, who are looking for simplified choices, a broader range of options in terms of content, all in one place and for good value. That's what we're looking to primarily deliver. But as David said, we've got sports and news that today are really untapped in the streaming world, and those are options for what we might be willing to do in the future, and we'll share more of that on the 12th with you.

In fact, we use news and sports quite effectively in Europe, and we've learned a lot about when it does work and when it doesn't. On the advertising side, it's a complex answer. I'll just take a swing at it, Gunnar, you can follow. The market is very challenging, particularly outside the U.S. right now, which is surprising. The sentiment is not terrific. The scatter market overall is very slow, steady to maybe a little better than it was in the fourth quarter, but the digital inventory, which held up in the fourth quarter has also softened. We have a unique situation. We have tremendous breadth with live news, live sports, entertainment, nonfiction, a significant share and reach. Having said that, we closed this deal right before the upfront and are first bringing our teams together. We've effectively done that now, but we had to take two different sales teams and pull them together. I'm hyper-focused on this, meeting once a week with the team, and I feel we're starting to gain some momentum on that. We also made a decision in the upfront to drive price rather than volume. I believe in that. Having been in this business for 30 years, I think to really drive asset value, you need to drive price. We were able to drive price significantly more than all of our peers. To do that, we took less volume than we could have. Now you see a soft scatter market, so that is impacting us versus others that took a bigger position in the upfront. That said, as we face the next upfront coming in two months, I think the breadth of our content together with where we go in on price positions us well for that. We'll keep in mind this balance of volume versus price, but I would always err toward price because I think that's where you really build asset value. We have also introduced digital advertising on HBO, which advertisers are excited about being able to be in these marquee shows, and we're doing it in a tasteful way by putting it at the front.

Yes. The only thing I would add is from the perspective of cyclical versus secular, there's no doubt. Ad levels in the industry were down 14% in the quarter. Arguably, we've done a little worse than that, partly driven by the scheduling or the sports schedules that David mentioned a couple of minutes ago. I think we are very well positioned to grow from here. Kathleen is doing a lot of work getting the enormous value of our library on screen. We've got tests going on, and it's very early, but some of the numbers that are coming in are exciting. We've restructured the team with development-focused doers running this portfolio as one integrated portfolio. We have a time-tested approach to cross-promotion, and we're adjusting that right now to the larger portfolio and the larger number of assets we are promoting. We have been able to put that to work behind some of our film launches, and we're seeing some real opportunity here. So I think we're very well positioned. The market itself is not good, as I've said before. It's not a good environment. We see weekly bookings ticking up slightly if you compare January and February with the November-December timeframe. There is tentative improvement in retail, fast food, entertainment; while technology remains depressed. As always, it's too early to really call a trend change here.

Though we assume things will get better in the second half.

Yes. We assume that. I have no doubt that when the market turns, we will be in a good position to capture that upswing, especially as more digital inventory becomes available, which last year was a limiting factor for us.

There's been an increasing discussion recently about what the right general entertainment content strategy is supposed to be for media companies as your models continue to pivot and become more streaming-centric. We've heard the word curated. I think you used it during your script. You also hear a bigger discussion around how you decide when something should be exclusive to your platforms and when maybe you should be licensing. So I was hoping you could just give us your most updated thoughts, so we have that framework for assessing the new product when you roll out on April 12.

Well, one of the significant advantages we have, Brett, is that we have this diversity of content. As we think about where we put content, as Casey looked at HBO, we were able to see which content people are spending time watching, what content is really powerful to us concerning reducing churn. A lot of content just wasn't being viewed. We were able to, in many ways, to analyze this. That's what led us to the conclusion that direct-to-streaming movies were providing no value to us. Therefore, we pivoted and decided to push our films back out with real windows to optimize those products. We're excited about the fact that we're going to take all of the Discovery content and put it together with the HBO Max content in a much better platform. The key to this company is, as a storytelling company, we have this diversity. We have storytelling and games with Hogwarts, which is off to a fantastic start for us. We have Channing and her team right now with the #1 or #2 show on almost every platform in America. We can pick from various options to build what may be most critical for us—a successful and profitable streaming business. That HBO Max, whatever we call it on launch, is a product we can take around the world and has a real impact on how people consume content. We believe in it because we think we have the best menu of content, the best portfolio, and the best quality. We're curating now in a way that's impacting America.

In answering that question, you reiterated something you’d said before, which was an intent to fold the Discovery content into the new product. There have been some media reports that you were going to keep Discovery as a standalone product. Is that something you're able to comment on now?

Simply put, for those that have Discovery right now, the churn is very low, and it's profitable. Many of those people will want to move up to a bigger, more robust offering. For those happy paying $5 or $7 to have home, food, and Discovery content. Our strategy is no subscriber left behind. We have profitable subscribers who are very happy with Discovery+; why would we shut that off? The platform itself for Discovery+ will be a shared platform. We have done substantial work to build this platform, benefiting all our subscribers on all our different products.

Just to be clear, the Discovery content would still be available on the bigger relaunched combined product. No question about that.

Two questions. David, if James and his DC strategy are successful, which I am sure is your expectation, what does that mean for the company overall over the long term? Successful films will help your Studio segment earnings. I know it's tough to put numbers around, but as you think about the impact of DC fully realizing the opportunity over the next 5-plus years, what could that mean for Warner Bros. Discovery and the earnings power of the organization? And then, Gunnar, you sound very bullish and confident about the D2C targets, the $1 billion of EBITDA in '25. Can you talk a little about the revenue outlook for D2C? You had 6% growth this quarter, a lot of that from advertising and content, but do you need revenue growth to accelerate to deliver that $1 billion? Maybe help us think about the levers you have and your expectations around the top line over the next few years?

Thanks, Ben. We are laser-focused on building this DC 10-year plan. James was writing Superman. We spend time with him and Peter, and he had a vision for DC that we are all in on and believe in. He presented that to you and the press about a month ago. It's one of the biggest value creation opportunities for us. I think it could and should be huge because it wasn't being pushed on. If you look at DC, Harry Potter, and Lord of the Rings, and then consider Warner as a company without those three, it's clear those franchises are tentpoles. When someone at dinner anywhere in the world mentions Batman, Superman, Wonder Woman, Harry Potter, or Lord of the Rings, they rush home to view that product that they love. It gives us a huge advantage with those tentpoles. We are a storytelling company, but we have an overwhelming advantage in the marketplace with the IP we own. To capitalize on that advantage, we need to create great content with that IP. We haven't done a Superman movie in 10 years. We haven't done new Harry Potter content in over a decade. With Lord of the Rings—one of the most fantastic franchises—Andy Jassy has been pushing it at Amazon with much success, but we own those movie rights. We want to optimize that as a unified company strategy, across film, TV, and even sell to third parties. We have something that no one else has. For us, DC alone could be a game changer. A lot was left on the table, but we got to take swings now. We have some of the best creatives in the industry focused on those swings.

Yes. Ben, on the D2C question, let me start with the revenue side of it. We plan for an inflection on the revenue side. The entire last year was impacted by this headwind from coming off of Amazon. We've now lapped that, and we're seeing some growth. We will always be a little lower than a pure-play D2C just because of the HBO linear trends that are included in our revenue number. We are definitely planning for revenue improvement. And then on the cost side, all trends are pointing in the right direction. We see better engagement, better churn, which improves marketing efficiencies. We've rightsized content investments. We have high hopes for all metrics after the combined product launches. We're also obviously looking at new market launches down the road.

I just want to add that for us, it’s not just a question of subscriber scaling. Yes, that's one important ingredient; revenue growth is a crucial second component. Internationally, we've previously discussed our pricing as significantly under where we think the market is. We see churn as a third important variable historically on the HBO Max product, but with the two products merging, ultimately reducing churn will play an integral role. Additionally, with the new product, some features and enhancements in performance will ensure higher engagement, which will help our ad-lite monetization. We also have rights to all our sports and news content, which could also drive further scale and pricing in the years ahead.

I have one for David and then one for J.B. or Gunnar. First for David, as part of the upcoming D2C relaunch, can you talk a bit about how you plan to balance protecting the HBO brand while leaning on the HBO premium content to help drive the new service going forward? And then for Gunnar or J.B., could you expand on your FAST strategy and why you chose to do the deal with Roku and Tubi and how that might impact the launch or timing of your own FAST service?

Look, the symmetry of the Discovery+ content, heavily viewed during the day and mostly during the day, fits well with HBO content, which is more family-watched. The more research we do, the clearer it is that these fit together well with appealing content for the family. We will have a clear attack plan to drive this across the country and into markets worldwide with conviction. On the 12th, we'll share that plan and how we intend to do it, but we're locked and loaded.

On FAST, the strategy is that our real asset has actual distribution options in nearly all forms of media—linear television, on-demand through streaming, games, theatrical distribution, free-to-air, and pay TV. Having all those distribution outlets gives us the optionality to examine data and see where we need to lean in further. FAST is one area; as we look at the evolving consumer behavior, a significant amount of free-to-air viewing is shifting to what we call free-to-view online. We don’t yet have a strong enough position in that market. The Roku and Tubi deal is really a starter for us—14 channels, a beginning for us. There will be more as we go through the year. We want a larger presence in that space because we see consumer behavior continuing to shift, and having a significant number of consumers around the world who will consume ad-supported content.

I want to follow up on the streaming discussion. You've been ahead of the curve here, but it seems like everyone is reshaping their streaming strategy in profound ways despite their org structure, content spend, and their investment philosophy around exclusivity and licensing. I believe the focus has been on each company's profitability, and perhaps not enough attention is being paid to how each of these moves could dramatically impact the industry and competitive landscape. Can you talk about how you see the streaming industry evolving with these changes? Where does WBD fit in this landscape?

For us, the market right now, our focus is on building a best-in-class product and putting all of our content together so that it's easy to consume and people are aware of all the diverse content we have. We believe we will recreate a streaming service that is ad-free, ad-lite, and we will run our own FAST service. You can choose how to watch—free content, ad-supported, or premium. It makes sense as we have the largest TV and motion picture library in the world. We want to super-serve our streaming service as a top priority while also managing our AVOD service. We can monetize content that isn't critical to subscriber growth. Content appearing on our platform non-exclusively is very economically beneficial. We examined content on each platform over the last two years and saw that, for instance, at HBO, the majority of viewership was restricted to only 40% of the content. Why should we not monetize it to shape shareholder value? Once we establish this funnel, we can take, for instance, the first season of Succession or the second season. We can put that down on our AVOD service and encourage viewers to subscribe. We will create a flywheel of our own, owning the entire ecosystem—subscription, ad-lite, and ad-free.

We believe the industry is experiencing a shift from scale at any cost to profitable scale. We believe in quality over quantity, and therefore, spending needs to be rationalized. Consumers seek more choices and value from fewer services, which shrinks share of wallet. By combining Discovery+ and HBO Max, we deliver a fantastic value proposition that targets a broader audience—enhancing our churn and scales.

The other point that is opportunity for us is curation. There is loads of content out there, but curation—creating content at a time when people can watch it and stimulating community conversation—is essential. If you look at The Last Of Us, it grew every week, and Euphoria captivated viewers. Delivering 20 million, 30 million, even 35 million in America watching and creating a conversation is powerful. Storytelling content is most powerful when shared with others, whether in theaters or online conversations about the shows. That is the content power—not watching it alone. Curating content for audiences to watch together creates a significant Warner Bros. Discovery advantage. We can deliver experiences around the world in theaters or on HBO on a Sunday. I believe that resonates with creative communities. They want their content to be seen, talked about, and respected. That is our culture here at Warner Bros. Discovery. The best thing we have going for us is the hard work behind us—the two years of effort condensed into ten months. All the recent meetings focus on the great content we're producing, meeting with creatives who want to join us, developing shows to keep on our platform, and getting ready for the new launch. I think this is an exciting time because we made some tough decisions; some we may need to adjust, but we feel optimistic about where we are and are accelerating forward.

David, to wrap that up on the content side: A number of your competitors have cut back on spending for cash content in '23 versus '22. It sounds like you have many new programs, movies, and initiatives planned, but at the same time, you are pulling some content. What should we expect for '23 versus '22? On the affiliate side, renewing 30% of your affiliate deals means what should we think of in terms of pricing, and how should that translate into results looking out to '23?

Look, on the content spend, remember, our strategy changes led to content restructuring and write-offs last year, causing cash implications. There will always be a place for quality content, and we're open for business. Content is the backbone of what we're doing, and we will continue to invest.

One of the tenets is that we won't launch content before it's ready. We have a lot of motion picture content we're reworking and making significant strides with. The Hogwarts game took several additional months to fine-tune. It's not about speed; it's about the best story being told. We will fight for Warner Bros. Motion Picture content investment; there's a massive opportunity there. We won't tell stories before they're done, so our releases aim to be the best they can be.

Regarding linear affiliate renewals, we are pleased with how those discussions went, proving the value our network portfolio delivers to our affiliates. To clarify, the reason we separated the linear from the network business is to provide transparency about where trends are moving. Net-net, I wouldn't expect sustained revenue growth in that segment, but we have years of that coming our way in terms of sustainability and free cash flow.