Warner Bros. Discovery Inc (WBD) — Q2 2023 Earnings Call Transcript

Good morning and welcome to Warner Bros. Discovery's Q2 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, which 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 Q2 earnings release, trending schedule, and accompanying slide deck will be 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. When we merged the two legacy companies and formed Warner Bros. Discovery 16 months ago, we did so with the ambition to be the greatest media and entertainment company in the world. And we continue to carry out our attack plan in all areas of the business. When you look back at what we said we would do, we're doing it. We said we were going to reimagine the company for the future and focus on free cash flow and deleveraging the balance sheet, and we are. This quarter alone, we generated over $1.7 billion in free cash flow and we're anticipating about the same in Q3. This is the result of the hard work of our teams, who have been bold, decisive, and disciplined. We've restructured our businesses for the future to position them to drive both profitability and long-term growth. And the results have been significant. As a further sign of our confidence in our free cash flow capability, this morning we announced a tender for up to $2.7 billion of our short-dated debt. We paid down $1.6 billion in debt in Q2, bringing our total debt retirement, before today's tender, to $9 billion since the merger. We expect to be comfortably below 4x leveraged by the end of the year, firmly within the investment-grade rating by midpoint next year, and at our target of 2.5 to 3x gross leverage by the close of 2024. With our free cash flow and leverage targets in sight, we are better positioned to lean into top-line growth opportunities across the company, and that's increasingly been our focus, starting with direct-to-consumer. We said we were going to build a strong, sustainable direct-to-consumer strategy focused on profitable growth as opposed to chasing subscriptions at any cost. And we are. In fact, we continue to track well ahead of our own financial projections. And as we told you last quarter, we expect our U.S. direct-to-consumer business to be profitable for the year 2023, a year ahead of our prior guidance. Our global direct-to-consumer business was roughly breakeven in Q2 and modestly EBITDA positive for the first half of this year. Our U.S. direct-to-consumer business is generating healthy EBITDA, which is helping to offset international losses, even with the product development costs and sizable marketing campaign associated with the launch of Max. The migration to Max has gone exceedingly well, with the overwhelming majority of subscribers in the U.S. successfully transferred. While we have seen some expected subscriber disruption, we have experienced lower-than-expected churn throughout this process. By all measures, the third-party metrics of the consumer experience are top-notch. The most important metric at this stage, only two months into our launch, is the amount of time people are spending watching our content. We are seeing early and encouraging signs of stronger engagement, with viewers not only watching for longer periods but also exploring new genres such as adventure, discovery, true crime, home improvement, and other nonfiction content. The mix of blockbuster originals from HBO, together with the nourishment and great personalities found on discovery+ content, makes for a very compelling content proposition. We're preparing to launch Max in markets around the globe over the next year and beyond. There is significant opportunity internationally in markets we have yet to attack. Importantly, the platform now has full capability to deliver live programming, and we'll have more to say about that soon. While Max will be a cornerstone of our company's growth, we also see great potential across a number of our other businesses. One is gaming. We're the only company among our peers scaled in gaming. Next up is Mortal Kombat 1, the highly anticipated new title in the acclaimed 30-year franchise set for release next month. This comes on the heels of the success of Hogwarts Legacy, which is still the biggest game of 2023. We're positioning our gaming business to be a much more strategic piece of our IP and consumer engagement puzzle, and we're investing accordingly. At Warner Bros. Discovery, we're one of the largest makers and sellers of content in the world. It's quality content that people want to watch. We had an industry-leading 181 Emmy nominations, including 127 for HBO and Max, the most of any network or platform. As a critical supplier of some of the most highly resonant television series, we are adding incremental asset value to our world-class portfolio. As we window that content around the globe, we expect to continue to see a tailwind of growth in our production business. Likewise, we have real ambition for the future of our motion picture business in the wake of the creative tour de force and global cultural phenomenon that is Barbie. While the studio's performance has been challenged in recent years and they've clearly under-earned their potential, we are taking meaningful steps with respect to the creative direction of both Warner Bros. Pictures Group and DC. A key facet of this strategy will be to lean into some of our great underutilized storytelling IP. It's been ten years since we made a stand-alone Superman movie and nine years since the last Lord of the Rings, for example. For many years, the secret to Warner Bros. profitability was tentpole films. They'd make two to three of them, together with a slate of new original content. We believe in the power of tentpoles, featuring great IP recognized by people everywhere in the world. It's our core strength, and we intend to get back to doing what we know works. While we've still got lots to do, we're very optimistic about the growth potential of this business. The culmination of what we're winning at both our film and television studios is further bolstering what is already among the industry's biggest film and TV libraries. As you would expect, a lot of analysis and strategic discussion goes into these decisions. In some cases, we'll want to keep premium content exclusively on our platform for a very long time. In other cases, we may sell it to third parties, which allows us to grow the pie. The fact is licensing some library content to other SVOD platforms, like Netflix or Amazon, as part of a co-exclusive agreement is just smart business. We're expanding our audience while maximizing the value of the asset and providing more revenue streams. This is our job: to optimize the windowing to get the best possible return on investment. We're also a global leader in sports, owning great sports rights from many of the top leagues in the U.S. that, in many cases, run through 2028 and beyond. We have the best digital and social sports platform for younger fans in Bleacher Report and we have significant digital rights in the U.S. that we're not currently deploying, but plan to in the future, which has real potential to create meaningful strategic value. We've had success in Europe and Latin America with layering sports into streaming with various business models. This experience informs our view on how to best deploy these sports rights here in the U.S. Our recent venture with BT in the U.K. has been a great example, merging BT Sport with Eurosport U.K., which is now called TNT Sports. This service is available on both linear and streaming and bundled with discovery+, our current streaming entertainment product in that market. We believe there's significant opportunity in the streaming space for sports, and we look forward to pursuing this incremental growth avenue. Underpinning all of the work we are doing is our strong commitment to operating Warner Bros. Discovery as one company. Consider Barbie; earlier this year, we created an attack plan for the summer of Barbie in anticipation of the launch of the movie which broke records and is now approaching $1 billion in global box office. Over the last six months, every area of the company has played a part in promoting this great film, from the four-part series, Barbie Dreamhouse Challenge on HGTV, which premiered in the U.S. to 4 million viewers, and was then broadcast across 146 countries, to Food Network's Barbie-themed Summer Baking Championship, and to Turner Sports' sneak peek of the film during the NBA Eastern Conference finals. It has truly been a one-company effort. This is one of the big differentiators and super strengths of Warner Bros. Discovery, where a property or title can benefit from eventizing across our global platforms. We're able to put the full weight and power of all our diverse media assets, domestically and globally, behind it to drive awareness and excitement. The result is truly unmatched. In light of the cyclical and secular headwinds facing the industry, we are working through some challenges. With respect to linear, we have a uniquely different hand; one that we believe makes us more resilient. On any given night, we reach an average of one-third of all cable viewers. This is a great platform for driving our brands and products as we saw with promotions from Max, Barbie, and Shark Week. Our ability to create unscripted content quickly and inexpensively tailored to viewers' preferences is a key differentiator. We believe this optionality provides us with greater longevity and sustainability. Meanwhile, we've worked hard on driving efficiency and productivity, enhancing our margins, recognizing that we need to do that because the overall business is facing secular decline. That said, it's still generating meaningful free cash flow that we can use to fund growth. While the linear business faces challenges from the soft ad sales market, we do see cause for optimism. We've nearly completed the U.S. upfront, our volume is up, and our price levels are consistent with the prior year, a very good result in a tough market. One more thing before turning it over to Gunnar: at Warner Bros. Discovery, we're in the business of storytelling. Our goal is to tell great stories, stories that entertain and, when we are at our best, inspire, with stories that come to life on screens big and small. We cannot do any of that without the entirety of the creative community, the great creative community. Without the writers, directors, editors, producers, actors, and the entire crew, our job is to enable and empower them to do their best work. We're hopeful that all sides will return to the negotiating room soon and that these strikes get resolved in a way that writers and actors feel they are fairly compensated and that their efforts and contributions are fully valued. With that, I'll turn it over to Gunnar, and he'll take you through the specifics of the quarter.

Thank you, David, and good morning, everyone. We have been hard at work at WBD, and much of our focus over the past 15 months has been on driving thoughtful efficiencies, merger-related and otherwise, and on implementing a cash flow mindset across the whole company. Our second quarter results demonstrate the fruits of that labor. Our disciplined transformation efforts have not only been a key factor in our ability to drive financial outcomes, but they have also made us ever more confident in the strategic vision we presented early on following our merger. Simply put, we have begun to conduct our business fundamentally differently. Some of what we identified very early on as near and long-term potential is beginning to be realized. These are durable performance improvements borne out of true change, and we see a lot more opportunity. To that end, adjusted EBITDA grew 23% in Q2, marking the second consecutive quarter of meaningful year-over-year adjusted EBITDA growth. Year-to-date, adjusted EBITDA is now up more than $600 million despite a persistently challenging macroeconomic backdrop. We have accelerated the delivery of our transformation initiatives, where appropriate, and have already delivered more than $2 billion in incremental cost synergies thus far this year. This has allowed us to offset the impact of market challenges and grow profits while at the same time funding many foundational investment opportunities. Our transformation team is still focused on generating new initiatives, and based on the successful implementation I am seeing and the size of the funnel, I am confident that we'll achieve $4 billion in total synergies much sooner than previously thought and now see a clear path to achieving $5 billion or more through 2024 and beyond. Our second quarter free cash flow of over $1.7 billion is strong proof of these efforts. Clearly, it was a healthy number and nicely ahead of our expectations. I am incredibly proud of this result, not only because it allows us to continue to quickly delever but perhaps, more importantly, I'm excited because this outperformance is coming through across a number of components of our cash flow statement and I view this as true cash focus becoming evident across the company. Key factors of the outperformance were: number one, slightly better-than-expected adjusted EBITDA; number two, improvements across virtually all elements of our working capital and other below-the-line items, which are part of a very long runway of opportunity that we are beginning to chip away at; number three, the closing of the gap between cash spend and amortization, partly due to shifts in the timing of production and partly as a result of implementing our new content strategy initiated last year; number four, modest cash savings from the impact of the WGA and SAG-AFTRA strikes, which we estimate were in the low $100 million range during the quarter. We also absorbed $200 million of cash restructuring and integration-related expense during the quarter, in line with our expectations. We repaid over $1.6 billion of debt, including $1.1 billion of the term loan and over $500 million of notes. We launched a tender offer this morning for up to $2.7 billion of notes that are maturing through the first half of 2024. Our net leverage came down significantly this quarter and is now at 4.6x. Consistent with our capital allocation policy, we remain focused on debt pay down and have a clear path to net leverage comfortably below 4x at the end of the year and reiterate our expectation to achieve target leverage of 2.5x by the end of 2024. Turning now briefly to the segments, which I will discuss as always on a constant currency basis. Starting with D2C, I am very encouraged with the results that effectively show breakeven EBITDA, which is far better than we expected, notwithstanding the significant investments in developing and marketing our new Max platform in the U.S. Q2 nicely demonstrates the underlying traction and efficiency from the integration of legacy D2C operations and organization. I want to call out that we saw growth across all three revenue streams, with content being the standout, helped by the timing of license deals. While selling content to third parties has been and will be a core element of our company-wide operating model, we expect some smoothing out of content licensing in the second half of the year. We saw a sequential net subscriber loss of 1.8 million in Q2. As expected, trends were impacted by overlapping subscriber bases between Max and discovery+, expected churn from the end of some key tentpole series such as The Last of Us and Succession, and wholesale declines, including unwinding some very low ARPU international wholesale distribution deals struck under the prior strategy that prioritized subscribers over ARPU, profitability, and value. Regarding overlapping subscriber bases, we saw several hundred thousand subscribers churn off during the quarter, significantly less than anticipated. While we expect elevated churn on discovery+, we also see engagement patterns consistent with what we saw prior to the Max launch, making us optimistic that our strategy to keep offering these two products was the right one for customers and for our business. Our streaming team did an outstanding job with this transition. We continue to see traction on the streaming advertising opportunity, supported by gains in ad-light subscribers, early initiatives on HBO and Max Originals, and increased engagement. While the overall advertising market remains soft, we see streaming and advertising well positioned to benefit from secular tailwinds over the long term. This is particularly true against the backdrop of the enormous value of our iconic shows for advertisers who, in the past, had no access to this inventory. We remain focused on further scaling this segment of our offering, and the relaunch of Max will certainly be a driver, both here in the U.S. and later abroad. I am proud of the meaningful strides we made in the first half of the year and see D2C as a key contributor to total company profit growth year-over-year in the second half. Turning to studios, the studios' performance has clearly been inconsistent. Our box office results in Q2 underperformed our expectations, which weighed on financial results. It’s ironic to have to say that given how incredibly successful Barbie has been, impacting Q3, of course, not Q2. Unpacking this, overall content revenues declined 25% due to: first, the slate, as I mentioned, as well as the timing of production for certain TV series and fewer CW series orders following the Nexstar transaction; second, lower internal sales to networks and D2C, partly resulting from the more disciplined content investment and programming approach we've implemented, such as exiting direct-to-Max movies or certain scripted series on linear for which we felt ratings did not justify the investments. Note that these lower revenues are offset in lower eliminations on the group level but impacted segment-level revenue. Thirdly, in gaming, The LEGO Star Wars game was released in the second quarter last year, which created a tough comp for this year. Looking ahead, we're delighted with the performance of Barbie thus far, now approaching $1 billion in global box office, and we're excited about its prospects through its remaining monetization window. For the remainder of our feature films this year, Warner Bros. television introductions, release dates, and performance expectations are naturally fluid given the ongoing strikes, and we will evaluate our options and update the market accordingly. It's possible we will see greater variability against our forecast. Turning to networks, advertising decreased 13%. As we called out last quarter, we faced tough comparisons as we did not have the NCAA Final 4 and championship games this year. Although we had the Stanley Cup finals for the first time, the net impact of these two sporting events was an approximate 200-basis point headwind. Adjusting for this, we saw underlying sequential improvement. I would characterize the broader tone of the marketplace thus far in Q3 as similar to Q2, certainly here in the U.S., while international markets are broadly a touch stronger. As David mentioned earlier, we are making strong progress on our upfront deals. Key callouts are: first, linear volume expected to be up, with pricing on balance pretty consistent with the prior year; second, D2C volume is up more than 50% in the marketplace in which CPMs are positioned to drive scale, for us as much as for the broader market. While visibility overall remains limited and the scatter market inconsistent, we expect continued modest sequential improvement through the end of the year and forecast global network advertising revenues will decrease in the high single-digit range during the second half of the year, with Q4 sequentially better than Q3, which is overall meaningfully worse than our forecast from earlier in the year. Distribution revenues decreased 1%, with a modest improvement versus last quarter as we continue to be pleased with the pricing and tiering of our networks and renewals, represented by their importance to both traditional and virtual bundles. Before wrapping up the segment discussion, I'd like to offer an update on the AT&T Sports Nets. I am pleased to say that we have been working diligently with the respective leagues and teams to formulate a plan to exit the RSN business in a manner that minimizes disruption to teams and their fans. We expect each of the networks to be sold or operated by the end of the year. While we've positioned these to operate at adjusted EBITDA breakeven, this business generated nearly $400 million of revenues in 2022 and skewed heavily towards distribution revenues. As these networks are sold or wound down over the next few months, we expect a modest impact on Q3 distribution and advertising revenues, with a more meaningful impact in Q4 and into 2024. Turning to guidance and our outlook for the year, let me start with our most important financial metric, free cash flow. For Q3, I expect us to generate free cash flow again in the $1.7 billion ballpark, reflecting similar underlying trends as in Q2, with sequentially larger savings from the strikes as well as the success of Barbie, notwithstanding roughly $900 million of semiannual interest payments. Based on this outlook, the health of the underlying free cash flow drivers and further opportunities in the pipeline, I see full-year free cash flow in the range of $4.5 billion to $5 billion. This also assumes cash restructuring and integration-related costs for the year of roughly $1.2 billion, which is a couple of hundred million more than our prior expectations. For adjusted EBITDA, I now assume we'll settle towards the low end of our target range of $11 billion to $11.5 billion. The key drivers for the final outcome will be centered around ad sales, D2C profit growth, and contributions from the studio segment. Let me provide some puts and takes. First, the timing and magnitude of a potential ad market recovery continues to be the most important driver of upside and downside to our results. Second, the D2C segment has driven our year-over-year EBITDA improvement, and we expect that to continue, helped by efficiency gains and top-line benefits. We see segment EBITDA losses of no more than a couple of hundred million dollars for the full year 2023. Third, uncertainty in the studio segment has increased with the dual strikes. This may have implications for the timing and performance of the remainder of our film slate as well as our ability to produce and deliver content. While we hope for a fast resolution, our modeling assumes a return to work date in early September. If the strikes run through the end of the year, I would expect several hundred million dollars of incremental upside to our free cash flow guidance and some incremental downside for adjusted EBITDA. When I take a step back, notwithstanding the factors influencing the broader landscape, I am convinced that the dedicated work of the leadership team and efforts throughout the company, marked by a meaningful shift in mindset about managing this company, is starting to pay dividends. I believe our financial results this quarter speak volumes about this change. I am very confident in the trajectory of our deleveraging and debt pay down, the benefits of which will increasingly allow us to turn our dedication and focus to support further growth initiatives to ensure long-term, sustainable, and profitable growth ahead. With that, I'd like to turn the call back to the operator and take your questions.

This is Kutgun Maral on for Vijay. One on M&A and one on the synergies. First, on M&A, based on commentary from your peers, it seems like there might be a willingness from some to reshape the media landscape a bit and that certain linear or maybe even streaming assets could change hands. From your end, it seems like there's a lot of comfort in getting to your leverage targets, the synergy capture machine is firing on all cylinders, free cash flow should ramp going forward, and of course, the second anniversary of the merger is closed, if not too far away. Can you talk a bit about your latest views on M&A and what's your appetite from a strategic or financial lens? On synergies, Gunnar, can you expand on your comments earlier a bit and help us understand where this increase to $5 billion is coming from? How should we think about the timing flow-through in 2023 and 2024? Should we expect this $1 billion upside will mostly be reinvested in the business? And are there any changes to the total cash cost you should be mindful of as we think of free cash flow over the coming years?

Let me just start by saying the team has worked hard over the last 16 months to restructure this business for the future to build a real storytelling company, where we can continue to invest our meaningful free cash flow to serve all of our diverse businesses. The deleveraging we're doing now, which has really accelerated, is a key element of making this turn. We've started to focus on each of our businesses now for growth. We like the businesses we have. We have a diverse set of assets, a global reach, and great tentpoles that have been underused that we can now get into, whether it's Harry Potter or Lord of the Rings, and the whole DC plan for the next 10 years. We feel very good about our hand, and our focus now will be to finish the deleveraging, which we've made the turn on now, and to focus on our own growth, which we think we can give the same attention to and rigor.

Yes. And Kulgan, on synergies, the headline here is, as David has said so many times, we have completely changed how we run this business. This is not about synergies or integration; it’s a fundamental shift in mindset that continues to come through. You saw the free cash flow number in the second quarter. I'm just amazed by the results, and it's coming through everywhere. As I said, there was a small strike impact here, but without the strike, it would have been a $1.6 billion number instead of a $1.7 billion number. I want to point this out because it’s not one or two things that stick out here; it's cash coming in everywhere across the P&L and below the line. We've achieved $2 billion of incremental value capture with our transformation initiative. I see $5 billion or more coming. A lot of that will hit in 2024 and beyond. We're still in the early innings of many of our systems transformations. We are rationalizing 260 systems across the company. All of that is still in the pipeline. Regarding where this is coming from, we have a significant cushion in the overall savings amount tied to all the initiatives the company is working on and are looking at how those are flowing through the implementation milestones. I am confident we will achieve $5 billion or more. This is not an integration exercise; it’s a transformation of the entire operating model for the company. Yes, we are reinvesting some of that. We've obviously reinvested some. If you look at the numbers, $2 billion has flowed through in the first half of the year. We’ve used some of that to offset the tougher macro environment and to fund investments across the company.

Maybe one question on free cash flow. The cash flow numbers are impressive for the quarter as well as the guidance for Q3. Gunnar, could you help us understand the working capital tailwinds? What are the sources of those? Looking beyond this year, to what extent can you keep harvesting that cash flow? As you look to next year, you have cash costs going down from integration and interest, but offsets potentially in the form of advertising or programming costs going up and DTC getting back to growth. Could you talk about those trade-offs for free cash flow growth drivers as you look beyond this year in terms of what they could look like in '24?

Sure. Starting with the drivers I mentioned in my prepared remarks, the most important point is cash is coming in across our entire cash flow statement. We've discussed this in the past; cash was never an objective in three-quarters of this company. We looked at the enormous amount of uncollected receivables, delays in sending out invoices, and the willingness to pay suppliers before payments are due. This was never a focus area for us. The discussion of a 10% margin business or a project: it could be a good project but could be a bad project if it takes three or four years to recover the cash. Those factors reflect a mindset shift across the company. Importantly, to address the question on the securitization facility, we've said a number of times that we're not intending to make that a major driver of free cash flow. It hasn't been a factor this quarter or year-to-date, and again, we don't expect it to be a major driver. Looking beyond 2023, you’re asking how this will develop from here. We still see multiple opportunities ahead from a working capital perspective; we are just getting started. We still work with incomplete instrumentation from a systems perspective, so there's more to come. I realize I forgot to answer your question directly: we had guided $1 billion to $1.5 billion in costs to achieve. We expect to be on the upper end of that range. $1.2 billion of that is going to flow through this year. Over time, interest will come down and CapEx will decrease. We have slightly elevated CapEx levels as part of our transformation focus. That’s a positive driver as well. We'll see how we do on the P&L. We've put ourselves in a position to support all three of our businesses, and we’ll update you as we get into 2024. This is not a one-time bump; we are changing how we operate the company and how we generate cash. In line with what we've always stated, we should ideally operate at a 60% cash conversion rate long term.

Thanks for the help in terms of thinking about DTC segment EBITDA as we move ahead. I was hoping you could spend time talking about how we should be thinking about revenue in that segment. In particular, what are the key puts and takes around the net add volumes as you move past the U.S. launch and start to expand into international markets? I'd also be curious about your updated thoughts on the balance between driving growth through pricing and ARPU versus focusing on volume.

Let me start, and then pass it to JB. Advertising for our D2C platform is a massive opportunity. We see that we’re growing advertising 25% in the quarter on the platform, even in a challenging market environment. In fairness, we haven't prioritized this yet. For the first time ever, advertisers will have access to some of the best shows in the landscape. This will be a growth priority, as we know we can generate higher ARPUs on the ad-light platform than on subscription ones. Related to that, I think of D2C coming into 2024 as a combination of different levers. JB?

To add on to Gunnar's comments, we look at multiple levers as we enter 2024, particularly the advertising opportunity, as it's been a huge driver of our success. We just started in February with advertising units in our most premium HBO content. That will contribute significantly. We've also seen healthy uptake on the ultimate tier, which increases ARPU for us. Engagement is another important metric; we've seen positive trends, which is a leading indicator to future churn, something we’re actively addressing. On the net add side, as we look to roll out internationally with more content offerings and potentially in the live space, we see incremental opportunities to grow subscribers and, importantly, revenue.

Great. Recent press reports suggest that ESPN is going to go direct in 2025. I think it's the first time we have a potential date for that. David, do you see that as a meaningful change in the TV landscape? Regarding your own sports portfolio, you talked about TNT in Europe. Any update on the timing of adding sports and news to your streaming offering? Will it be folded into Max, or could there be a separate offering that could be bundled with Max?

Thanks, John. First, when it comes to our sports rights domestically and globally, taken as a whole, we are in a strong position. We have good deals in the U.S. and around the world that provide value. One element of these deals is that we own the digital rights to our sports, allowing us to put that content on our platforms at no extra cost. We're doing it in Europe in various ways—sometimes as an incremental tier or as part of the entire platform. We've been at it for about one and a half to two years, and it's compelling. I’ve talked about news and sports as key differentiators for us. We're working actively this summer to refine the platform. We've seen strong viewership on our platforms, and most of our content is now going over to Max. We recognize the urgent need to grow our streaming audience. News and sports will make these platforms come alive, and we’ll be making announcements on that soon.

Great. And on the indirect side?

Our focus is to use our sports domestically and globally to create more shareholder value and stronger economics. The leagues want to reach more demographics, so that's our priority. We also have Bleacher Report and House of Highlights, which present a significant opportunity, and we’re focused on how to leverage those together because they are the largest platform for people under 30 in sports.

Just on film, maybe to go a little deeper. Barbie was outstanding. What lessons have you learned from having original IP and brilliant marketing, and how does this shape your film strategy going forward? Can you talk about the impact to Max when it hits the platform? Additionally, regarding the studio segment, have you seen any change in demand given the strikes, or could you discuss the overall demand for your content?

Well, thank you, Jessica. Barbie is important because we think one of the big unlocks of value is operating as one company. We've started having weekly meetings between all the businesses and all the creatives. We first got behind House of the Dragon and launched promotional initiatives across all platforms, including the baseball playoffs. Similar efforts were implemented with The Last of Us and Hogwarts Legacy. With Barbie, we’ve supersized our push, leveraging all of our resources and platforms globally. It starts with great content, but we can build our muscle memory for how to maximize these assets. We're focused on growing our business. We’ll let the movie run through its motion picture window, letting the brand grow, before putting it on Max in the fall. We expect a significant impact from this on our platform.

Movies are a very important part of the Max offering. In the U.S., we’re particularly reliant on the Warner slate. Outside the U.S., we're still multi-studio, which includes the Warner slate. Film continues to be vital, and it benefits Max in various ways. Titles that don’t do well in theaters tend to perform better on Max, as fewer people have seen them initially. The bigger titles, like Batman and Barbie, will certainly do well when they come to the service because they have significant rewatch value.

The key for us now is to capitalize on the renewed focus on growth as we have accelerated the deleveraging process. We now have command over each of our business units, and we're committed to using our unique set of global assets to drive growth. We're starting to focus more explicitly on growth strategies, and you will see further developments in that area. Our content licensing efforts leverage one of the best TV and motion picture libraries in the world. While we’re below the levels of the last few years, demand might increase as the strike continues. We’re always looking to maximize our capabilities, and while we hope the strike concludes quickly, we believe resolving this matter will help us get back to focusing on creating content.

David, you’ve been through many cycles, particularly advertising cycles. How would you describe the current environment? I think of your Jack Welch story talking about ratings going down while advertising goes up. Do you see any concern we may have reached that point for linear TV? And, as it relates to Max, do you feel optimistic about transitioning that linear money over to D2C?

Thanks, Ben. The market has improved slightly last quarter, and we think we see a bit more improvement this quarter as well, although not significantly. We're observing some more encouraging signs outside the U.S. but it’s been unusual. I think many of us expected a meaningful recovery in the second half of the year and have not seen it materialize. We've figured out how to adapt to that. Our recent upfront is encouraging; we’re seeing mid-single-digit increases on the sports side. We benefited from price increases in some of our affinity networks. While we’ve seen a decline in some of our smaller networks, Max has been a major success. With great content, including HBO and Max’s KC, it allows advertisers access to high-quality content, especially in less cluttered placements. However, we need to build the Max platform to compete with linear dollars. There’s demand to build that up, and we’re pushing hard to drive down churn and grow Max.

I want to ask about the strikes and the international business. First, on the strikes, David. From the outside, it feels like the two sides are very far apart, could you characterize how far apart? You’re negotiating on behalf of but your interests are at stake too. How influential do you think you can be in bringing both sides together? On the international business, you mentioned opportunities there. Your international business has a big mix of brands and licensing. Could you talk about your strategic vision here? Is it to have one strong, single brand like Netflix? What milestones or initiatives are you looking to achieve over the next 12 months?

On the strike, I'm very focused on it because it's central to our business. It's critical that everyone involved—the writers, directors, actors, producers, and all crew members—are fairly compensated and feel valued. We're dedicated to bringing both sides to a resolution that respects everyone’s contributions. I’m hopeful this will happen soon; the entire industry is keen to resolve this quickly. When it comes to international streaming, we will transition to a unified brand with the Max launch in the next 12 months, particularly for LatAm, EMEA, and APAC. We're excited about the potential of a mixed content offering. Original productions outside the U.S. will play a significant role in feeding Max, particularly in Europe and LatAm as we prepare for the upcoming Olympics.

Congrats on Barbie. I'm excited for Shaq and Charles to discuss a Barbie-Superman team-up. Following up on two points, John’s question suggested NHL is coming to Max. Should we expect Max to align further with Turner Sports programming? Will that require price increases for subscribers? Also, regarding lower DTC churn in the quarter, was that driven by overlapping HBO and Discovery subscriptions? What do you foresee regarding this consolidation?

We consider our sports rights a strong asset, and we have a strategic plan that we’re finalizing to maximize their value. We will be clear about our approach regarding news and sports on our platforms to generate future shareholder value. JB?

As David mentioned, we have a mix of monetization models today. Generally, our view is that sports is a premium offering with a passionate fan base; thus, it will need some form of additional monetization. The way that will come to market will be detailed later. Regarding the overlap, we've previously estimated about 4 million global overlapping subscribers between HBO and Discovery, with a significant portion in the U.S. In Gunnar's remarks, he indicated that several hundred thousand subscribers churned off in the U.S., which was less than we expected. We will likely continue seeing some reduction in the overlapping sub-base, but it has been much lower than we anticipated. This reflects positive engagement trends.

We will discuss news and sports soon. Furthermore, we are undoing deals with low ARPU internationally that do not reflect our brand. We want to enhance profitability while maintaining quality subscribers. Let’s move away from unprofitable agreements and focus on real value and economics.