Warner Bros. Discovery Inc (WBD) — Q4 2023 Earnings Call Transcript

Good morning and thank you for joining us for Warner Bros. Discovery's Q4 earnings call. Joining me today is David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette, CEO and President, Global Streaming and Games. Today's presentation 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 may include comments regarding the company's future business plans, prospects and financial performance and involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on 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. And with that, I'd like to turn the call over to David.

Hello, everyone, and thank you for joining us for our fourth quarter and full year earnings call. Our top priority this year was to get this company on solid footing and on a pathway to growth, and we've done that. We said we would be less than 4 times levered, and we are. We paid down $5.4 billion in debt for the year for a total of more than $12.4 billion since the deal closed. We're now at 3.9 times and expect to continue to delever in 2024. We've significantly enhanced the efficiency of the organization with a long runway still to go. We said we were going to generate meaningful free cash flow, a key KPI for our leadership and company, and we've exceeded our goal with $6.2 billion for the year. Gunnar will take you through the financials, but I would just highlight that as we look at the start of the first quarter, two months in, we are already seeing markedly improved free cash flow for Q1 versus the first quarter last year, and inflection sequentially in linear, and an acceleration in streaming advertising. We are optimistic that the efforts we've undertaken on digital and advanced advertising solutions, much of which you'll hear about leading up to and during the upfront, will enable us to achieve a more competitive profile. Bottom line, we're a far healthier company now, and we're building real momentum. And we expect 2024 will be a year to drive that momentum forward even further. That said, this business is not without its challenges. Among them, we continue to face the impacts of ongoing disruption in the pay-TV ecosystem and a dislocated linear advertising ecosystem. We are challenging our leaders to find innovative solutions. For example, our US networks and sports teams have been collaborating on a number of initiatives aimed at expanding audience reach and impact through cross-promotion. And I do believe we are getting smarter at determining what's working and what's not, which is helping to drive healthy traction in ratings and an improved near-term outlook in advertising revenue. Internationally, Gerhard Zeiler and his regional teams are doing an outstanding job, as international networks are performing strongly and gaining momentum, particularly in EMEA. Of note, linear advertising in EMEA was positive in Q4, with standout markets in Poland, Germany, and Italy, the latter of which is enjoying a truly material upswing in ratings behind some of the incredibly successful programming moves at flagship NoVe, which had its best quarter ever in Q4. I was just in Italy two weeks ago and spent some time with the team. Their ratings this quarter are tracking up over 20%. It's a terrific creative team and they have some real momentum. In fact, EMEA enjoyed its largest quarterly year-over-year share growth since the outset of the pandemic in 2020, despite some sluggishness in the UK and certain Nordic markets. This next chapter for Warner Bros. Discovery is about putting us on a pathway to growth. And we've got a lot of drivers of that growth, which at its core is underpinned by great storytelling. We are a creative storytelling company powered by 100 years of arguably the best franchises, brands, libraries, and content in the business, and we are on offense. Our studios are back and firing on nearly all cylinders after the strikes. We're one of the biggest makers and sellers of content in the world. On the theatrical and gaming side, while we did have some real misses this year, we also had some really big wins, including Barbie, the number one movie globally and the most successful movie in the history of Warner Bros., and Hogwarts Legacy, the biggest game of 2023. Also in 2023, we relaunched our theatrical animation division with a commitment to have two features a year on our slate beginning in 2026. Bill Damaschke is leading our animation division after spending two decades at DreamWorks and he's hard at work here with us on the lot. Now with the addition of animation, DC, and our existing Warner Bros. and New Line Cinema labels, we have created a home for every kind of film and story to be told. And we are excited about what's ahead for movie-going audiences. We've had a challenging couple of years, but we are now very excited about our slate in the year ahead, starting with Dune: Part Two, which arrives in theaters a week from today and has strong tracking, 97% on Rotten Tomatoes, which is rare for a sequel. We also have Godzilla vs. Kong: The New Empire, a follow-up to the hugely successful 2021 film opening next month. When we launched this company almost two years ago, we made it clear. We believe in this business. We're a pure storytelling company, and we're going to bring the best people in front of and behind the camera back to Warner Bros. And we have been laser-focused on doing just that. First, Warner Bros. is back in business with Tom Cruise. Our partnership with Tom is off and running. Mike and Pam spent a couple of days hard at work with Tom in London earlier this month. As you saw yesterday, we are in negotiations for a new film by Academy Award winner Alejandro Inarritu starring Tom. This will be the first of many films with us and Tom and we look forward to a long future together. Paul Thomas Anderson is also at Warner, hard at work on his new film, starring Leonardo DiCaprio, Sean Penn, and Regina Hall. Maggie Gyllenhaal's new movie is set to begin shooting soon, starring Christian Bale, Jesse Buckley, Penelope Cruz, and Annette Benning. Black Panther's director, Ryan Coogler, and star Michael B. Jordan are coming together for a new original genre film that will go in front of cameras later this spring. George Clooney is back with Warner Bros. and working on a number of exciting projects. On the TV side, we just announced another season of the hit show, True Detective with creator and show runner Issa Lopez. A juggernaut series, The White Lotus, from creator and showrunner Mike White, is currently in production. And Craig Mazin has started filming the new season of the hit show, The Last of Us. It's really encouraging to see so many incredibly talented creatives here at Warner Bros. And most importantly, they share our vision to be home to great storytelling, stories that entertain, inform, and when we are at our best, inspire. This is the Warner Bros. we are building together. This is the Warner Bros. of the future. A real strategic advantage we have as a company, and I've talked about it often, is the strength and depth of our franchises, which I believe will be a meaningful driver of asset value and growth for us. And we intend to deliver on our commitment to reinvigorate the best of them. And as I've said, major franchises have been underused and under-leveraged. We are hard at work to begin to get full value. Superman, we haven't made a Superman movie in over a decade. James Gunn's Superman starts filming next week. I've had a glimpse into what James and Peter are doing, and it really does serve as an exciting indicator of where the new DC is headed under their leadership. And there'll be more that you'll hear from them in the months ahead. Game of Thrones. George R.R. Martin is in pre-production for the new spin-off, A Knight of the Seven Kingdoms, which will premiere in late 2025 on Max. Harry Potter. We've not been shy about our excitement around Harry Potter. The last film was made more than a dozen years ago. I was in London a few weeks ago with Casey and Channing, and we spent some real time with JK and her team. Both sides are thrilled to be reigniting this franchise. Our conversations were great, and we couldn't be more excited about what's ahead. We can't wait to share a decade of new stories with fans around the world on Max. We're aiming for a debut in 2026. The top priority for us has been building Max, our streaming service. We fought hard to get Max to be profitable last year. We are now committed to driving profitable top-line growth. And while it's still early innings, we feel good about the trajectory we are on and are on track to achieve our guidance of $1 billion in EBITDA in 2025. We're especially excited about the next 24 months. We have a number of meaningful growth levers ahead, including the rollout of Max in key international regions and markets, starting with Latin America next week, with markets in EMEA and APAC to follow later in the year, including new markets, France and Belgium to coincide with the Paris Olympics this summer. Keep in mind, we are only available in less than half the addressable households and markets compared to our larger peers. So we still have a huge opportunity for growth and globalization over the next two years, including many critical markets around the globe, such as the UK, Germany, Italy, Australia, and Japan. All of which we have a substantial amount of local content, and in many, we have sports as well. We're also driving better segmentation and monetization by launching the new ad-supported offering which is currently only available here in the U.S., and by the end of this year will be available in over 40 markets globally as well. We also have a number of lucrative partnership deals internationally that will help us scale in a more efficient and accelerated fashion. It's worth noting that Q4 saw the lowest US churn rates in HBO Max and Max's history. And the personalization and product improvements planned for this year should continue to have a positive impact on churn. And finally, we're excited to be refreshing and reigniting our content pipeline at Max. The fact is, the strikes really slowed down production. And we didn't have as much content as we wanted for Max. And we're now moving forward with a great slate. Our most recent series, True Detective: Night Country, starring Jodie Forster, was a real success, averaging over 12.5 million viewers, the highest season ever for the series. Looking ahead, we've got one of the best lineups in the history of HBO. This next quarter, we'll have Hacks and House of the Dragon, followed by DC's The Penguin and the new Dune series. Then in 2025, we'll kick off the year with the new season of The White Lotus, followed by The Last of Us and Euphoria, just to name a few. Also coming to Max from Warner Bros. Motion Pictures are Aquaman and the Lost Kingdom on February 27th. Wonka will join the service on March 8th followed by Dune: Part Two in the spring. We also inked a multi-year deal with A24 in December to bring A24 theatrical releases exclusively to Max. They've already started being carried. I want to mention one other area of our business before turning it over to Gunnar to talk through the quarter. As you heard last week, we're entering a new joint venture with Disney and Fox focused on sports. We believe this will provide a terrific consumer experience and will be a great business. We couldn't be more excited about it. We'll also be able to bundle this product with Max. So we see this new joint venture as another potential driver of incremental growth for our business going forward. One more point on our sports business. Last weekend, we saw great coverage and strong ratings at the NBA All-Star Game and All-Star Weekend. We have a strong positive 40-year relationship with the NBA. And in terms of our NBA rights, we are now fully engaged in renewal discussions, and they are constructive and productive. Our global sports portfolio continues to provide real meaningful value to all of our platforms. We're proud to be the home of one of the most coveted collections of premium sports content in the industry, along with a best-in-class talent roster and exceptional production values. We're excited for our expansive coverage of the Paris Summer Olympics throughout all of Europe as well. The hard work we've done over the last nearly two years has positioned us well financially and creatively. And as we look towards the future, we will continue to make the tough calls and do what is necessary to get this business on a clear pathway to growth and to drive increased shareholder value. With that, I'll turn it over to Gunnar, and he'll walk you through the financials for the quarter.

Thank you, David, and thank you everyone for joining us this morning. 2023 was indeed a year marked by the accomplishment of several key objectives, and I'm very pleased with the effort across the organization to evolve our company as our industry continues to change. We come into 2024 well-positioned and once again with an ambitious agenda to further enhance our financial and strategic profile and to drive meaningful long-term shareholder value. Though we grew EBITDA 12% for the year on a pro forma basis, more than $1 billion year-over-year, the enormous financial benefits of our many important and successful transformative efforts have been somewhat mitigated by sustained headwinds across the industry. Yet we made strong progress against this backdrop this year, and I'd like to highlight a few notable accomplishments. First, our post-merger integration is substantively complete as of the end of 2023. We have now achieved total combined merger and transformation savings of $4 billion, not including the significant savings realized on content as well. As David has laid out before, while we talked about synergies, we're really applying a fundamentally different management approach to the combined company, data-driven and rational, with shareholder value at the center. There are substantial improvement opportunities left for us to capture, particularly in areas such as enterprise systems, production flow, global centers of excellence to name a few, and we expect to see this reflected in our near and long-term free cash flow generation. This is an entire organization buying into and operating with a one-team, one-company mindset. Second, our streaming team has made the turn. The D2C segment generated approximately $100 million of positive EBITDA, a $2.2 billion improvement year-over-year on a pro forma basis, well ahead of our targets. This was accomplished with a tremendous level of rigor and discipline across every aspect of the business, from programming to marketing to technology. And as expected, we've begun to see an inflection in subscriber-related revenues, both distribution and advertising, which accelerated to over 6% during the second half of the year versus very modest growth in the first, helped by price increases, growth in the ultimate tier, and scaling of the ad-lite subscriber base. 2024 will indeed be a pivotal year for Max. Relaunches and rebranding in existing Latin American and European markets over the next few months will be critical to bringing consumers an improved product experience and a more robust content offering, which will put us on better competitive footing. We will continue to take a disciplined approach to investing in subscriber growth, mindful of lifetime value to subscriber acquisition cost ratios as we proceed into this next phase. D2C advertising growth should layer in nicely throughout the year and the business is gaining momentum as it scales. With a more high-profile slate of shows from HBO scheduled for release throughout the year as compared to the second half of 2023, we're very well positioned to offer a greater share of highly coveted premium streaming inventory. Third, you have heard us talk about the free cash flow opportunity since we first announced the deal. In 2023, we generated $6.2 billion of free cash flow, a 60% conversion of our EBITDA to free cash flow. The impact of the strikes contributed roughly $1 billion to free cash flow while negatively impacting our EBITDA by a few hundred million dollars. We made great strides in realizing capital efficiencies throughout the year, and it was particularly evident in Q4 with over $3.3 billion of free cash flow generated this quarter alone. I am very pleased with the momentum here as the focus of the entire team continues to shift towards a deeper understanding of capital returns and shareholder value. We have laid a very solid foundation in 2023, and I expect 2024 to be another strong free cash flow year. Finally, all of this has helped support $5.4 billion of debt paydown during the year, including all of our more expensive variable rate term loans, enabling us to finish 2023 with less than $40 billion of net debt and resulting in net leverage of 3.9 times EBITDA, in line with our guidance from last February, despite all the headwinds mentioned earlier. I am very pleased and comfortable with our current capital structure, given the tremendous progress we have made. The entirety of our outstanding debt is now fixed with an average cost of 4.6% and an average duration of 15 years. Importantly, we have only very manageable amounts of debt coming due over the next three years, $1.8 billion this year; $3.1 billion next year, and $2.3 billion in 2026, providing us with real flexibility in how exactly we deleverage the company. We remain committed to our long-term gross leverage target of 2.5 times to 3 times, and while we do not expect to hit that target by the end of this year, as we noted on our last earnings call, we do expect to continue delevering in 2024 as we stay focused on debt repayment with our free cash flows and any proceeds from non-core asset sales like the All3Media sale announced last week. Turning briefly to the quarter, which I will discuss on a constant currency basis, I'd like to call out a few items and offer some additional puts and takes to consider for each of the segments. Starting with Studios. The primary callouts were, number one, the impact of the strikes, as I noted, which halted the production and delivery of TV content during the fourth quarter, which also informed some of our decisions about retaining or licensing content externally in the second half of the year. And two, what can best be characterized as an inconsistent performance of a theatrical slate. Wonka, the co-financing partnership, has had great success at the global box office and performed well above expectations, while Aquaman and the Lost Kingdom and The Color Purple unfortunately did not. This was evident in our lower-than-expected financial results across revenue and EBITDA. A couple of items to consider for the Studios segment during the coming quarter. We are lapping the release of Hogwarts Legacy in February last year, which saw the largest portion of its very positive financial impact in the first quarter. This year, Suicide Squad, one of our key video game releases in 2024, has fallen short of our expectations since its release earlier in the quarter, setting our games business up for a tough year-over-year comp in Q1. On the film side, Q1 will be burdened with the marketing campaigns for Dune: Part Two and Godzilla vs. Kong, which opens at the very end of the quarter. Turning to Networks, revenues decreased 8% as advertising decreased 14% due to continuing softness in the US linear advertising market. Note, the disposition of the AT&T SportsNet negatively impacted advertising revenues by approximately 100 basis points during the quarter. While still not back to where we'd like it to be, we are seeing a nice improvement thus far in Q1. Domestic ad sales are pacing meaningfully better quarter to date as we are beginning to capture the benefits of our strong upfront deal struck last year. International ad sales, which accounts for over 20% of total network ad sales, continue to be firmer overall, particularly in EMEA, which represents over three quarters of international ad revenues, and where we saw modest growth year-over-year during the fourth quarter. Like the US, we're seeing acceleration through the beginning of the first quarter so far in EMEA overall, while we continue to face a challenging market environment in LatAm as ad dollars more steadily migrate to streaming, which ultimately presents a nice opportunity for Max as we relaunch in these markets. Network distribution revenues were effectively flat in the quarter after adjusting for the 400 basis points of headwinds from exiting the AT&T SportsNet and transferring the TNT Sports Chile business to the D2C segment. On a reported basis, revenue decreased 3% as US pay-TV subscriber declines outpaced US affiliate rate increases, while inflationary impacts supported by inflation-linked pricing agreements in Argentina also benefited results. Overall, Networks EBITDA decreased 11% as the decline in high-margin advertising revenues was only partially offset by a 3% decrease in operating expenses, excluding the AT&T SportsNet's and TNT Sports Chile impacts. Turning now to D2C, we finished the quarter with nearly 98 million subscribers, a modest sequential increase after accounting for the full consolidation following our acquisition of the outstanding shares of BluTV as well as transferring our TNT Sports Chile subs to the D2C segment as part of our premium sports streaming strategy. International remains the most important driver of our D2C subscriber growth with over 1 million subscribers gained in Q4. This more than offset domestic declines, where we continue to feel the impact of the partly strike-driven lack of fresh tent-pole content through the second half of the year. And as discussed before, remember that linear wholesale losses continue to mask underlying retail D2C traction. Content revenue in the segment declined 30% due to the intra-year timing of third-party licensing deals that we laid out in detail earlier in the year. Keep this in mind as we comp this in Q2 of 2024. Among the D2C subscriber-related revenues, which were up over 6% in the quarter, distribution revenues increased 4% and benefited from price increases in the US and certain international markets, as well as the Amazon Prime partnership in the US, which we lapped in December. Advertising revenues accelerated nicely versus Q3 to over 50%, helped by the 2023-2024 upfront deals, higher engagement on Max, and ad-lite subscriber growth. We currently see the pace of D2C advertising revenue accelerating off this pace in Q1 and expect this to be an impactful segment driver for 2024 overall. With regional relaunches and key new market launches heavily weighted towards the first half of the year, we expect D2C EBITDA to be modestly negative in the first half and then profitable again in the second half. Net-net, we currently expect the D2C segment to be profitable for the year as we continue to pivot our focus on profitable top-line growth. We remain focused on our target of $1 billion in D2C segment EBITDA in 2025, and 2024 will certainly lay important foundations for achieving this goal. Turning to our outlook for Q1 free cash flow, we're off to an outstanding start. Remember, Q1 is traditionally our seasonally weakest quarter, yet we see continued strong momentum so far and expect a very meaningful improvement year-over-year from the negative $930 million we incurred last year. We continue to capture our cash opportunities, and I believe we have many more bites at the apple for years to come. Let me mention additional puts and takes to consider as you think about free cash flow for the year. Number one, the net cash benefit from the strikes, which will reverse this year as content production resumes to normalized levels, will naturally be a negative to free cash flow. We incurred roughly $1 billion in integration related cash costs, which is a little lower than what we had anticipated for 2023 due to the timing of certain initiatives. As we continue to execute on our transformation journey, we will likely incur some additional cash restructuring costs, but we expect this to be at a significantly lower level. Number three, the Olympics will be a drag on free cash flow this year, given its working capital dynamic. Number four, interest expense will certainly be lower in 2024 as we continue to delever and CapEx will likely be slightly lower as well. Finally, of course, EBITDA will be the biggest determinant of free cash flow. Before I turn it back for Q&A, I'd like to finish with a final remark on the magnitude of change that's taken place at WBD. It really is night and day compared to where we started. Of course, we still have additional work to do and more opportunity to capture, but the heavy lifting we've done helps pave the way for ongoing transformation and our ability to embrace the three pillars of our strategy, which reflect our strong commitment to quality storytelling, achieving maximum value through broad distribution and monetization, and operating professionally with a one company mindset. We are significantly closer to our longer-term leverage targets with more than $12 billion of debt paid down in less than two years. Certainly, having a more flexible financial profile doesn't insulate us, or anyone else for that matter, from having creative wins and losses, but it most certainly will help us take the necessary steps required to further achieve our growth objectives and to more intently focus on driving shareholder value. Now, David, JB and I will take your questions.

Good morning. Thanks. This is Kutgun Maral on for Vijay. One on the Studios and one on DTC. On the Studios, can you talk a little bit more about your strategic outlook over the next few years? And when do you think we'll get to see the execution on your vision manifest more meaningfully from a financial perspective? Can we see more signs of this in 2024, 2025 or do you think it'll still be at least a few years until we get it to full value since it takes a while to reinvigorate franchises? And at DTC, when I look at Max from a content perspective, it feels a lot more like legacy HBO Max, and maybe with less of a focus on legacy Discovery+. So I was hoping to get a little bit more color on how you think about the content portfolio overall at Max, and if there are areas you expect to invest more or less in going forward. And I guess as we all think about the evolution of the broader media ecosystem and debate M&A scenarios, what I'm really trying to get at is, whether more programming tonnage is necessary to be successful in DTC as we think about the evolution of the broader ecosystem. Thanks.

Thank you very much. We've faced two challenging years with inherited products that impacted our balance sheet. This year, we anticipate significant improvements. Wonka performed strongly, and our team has effectively reworked that product. We have demonstrated our capability to market globally. We're deeply committed to the Motion Picture business, supported by exceptional talent. For this year, we have exciting releases including M. Night Shyamalan's His Daughter, Beetlejuice, and Todd Phillips' Joker 2. Our lineup this year is notably more compelling, and our team is prepared to build these brands globally. We are focusing on DC projects like Superman and Supergirl, with promising scripts being developed. Additionally, James and Peter will provide insights in the coming months regarding our ten-year vision. We are also pursuing franchises like Lord of the Rings and Harry Potter, alongside existing beloved brands such as Game of Thrones. While we appreciate these established franchises, we also recognize the need for fresh content like Barbie, in which Mike and Pam have excelled. Our commitment to the Motion Picture business is being recognized in the industry, attracting top talent to join us. I am excited about this year's offerings and what is to come. Overall, the studio has underperformed, particularly toward the end of last year, but we are optimistic about this year, which presents significant opportunities for growth in the next two years. It has indeed been a challenging journey. JB?

Yes. Regarding the D2C segment, a few key points. Firstly, as we've mentioned in earlier calls, after eight months, we are encouraged by the increase in engagement measured by time spent per account, primarily due to the addition of legacy Discovery content, which has not negatively impacted the legacy HBO Max content. We've observed higher engagement and extended viewing hours, all thanks to this addition. Secondly, if you examine the top 10 shows, it clearly reflects our success. Often, programs like 90 Day Fiancé and other legacy Discovery content feature prominently, sometimes occupying three, four, or five spots in the top 10 series on Max. This highlights the diversity of our content and the successful merger of the two content portfolios. Lastly, looking ahead to the next 12 to 36 months, about a year and a half ago, Casey and the team with non-HBO content focused on larger, more expansive Warner Bros. franchises. The upcoming lineup is broad and includes popular titles like Penguin, Dune, It, Conjuring, and Harry Potter. We believe we are on an excellent path. In fact, the content available on Max over the next two-plus years will be the richest and most diverse it has ever been, not only on Max but also within the HBO lineup.

We have seen a notable contrast over the past six to eight months where there was a lack of content. What is encouraging is that despite this, we have managed to grow without much fresh material. The release of True Detective marked the beginning of our efforts, and we plan to introduce various franchises and shows in the next 12 to 24 months, which gives us a strong sense of optimism.

Great. Thanks, guys. Two, if I could. First, maybe for Gunnar. Thanks for some of the puts and takes for 2024, but just any other color you could give regarding EBITDA and potential growth, maybe break down it by segments if you could? And then on the new skinny sports bundle, just any other info you guys could provide in terms of what the product is going to look like, pricing, economics, and just maybe, David, your confidence that it's not going to accelerate cord cutting. Thanks.

Sure. Let me begin with that. There are approximately 125 million households in America, and over 60 million of those are not part of the traditional bundled cable system. We see this demonstrated with Bleacher Report, which has around 30 million users, mostly under 30, who predominantly are not in the traditional cable world but are passionate about sports. They engage with Bleacher and House of Highlights extensively. Therefore, we have a significant target audience of more than 60 million sports lovers. Our product is very modern. Nowadays, when people wonder what channel to watch their sports on, they'll be able to use this new app-based product. If you enjoy the baseball playoffs, you'll watch all of them without asking what channel it's on. For hockey, you’ll catch all the playoffs leading up to the Stanley Cup, and for basketball, you'll follow through the championships without ever needing to search for where it’s airing. This platform is intended for the younger generation that isn't subscribing to cable, enabling us to reach those we've been missing out on. The traditional cable industry has overlooked these potential subscribers. We believe this is very beneficial for consumers. We maintain a strong relationship with our existing distributors. This unique product is designed to fulfill a robust demand. Together with Disney and Fox, alongside Bob and Lachlan, we are aligned and share a vision for a compelling product. We plan to be very aggressive in our marketing efforts, and we believe this product will coexist effectively alongside traditional cable. We don’t anticipate a large number of people unsubscribing from cable for this. We aim to engage the 60 million-plus potential customers who aren't considering cable as they move into their own places. We’re quite excited about this development. I have reviewed several prototypes, and we are making significant progress. This isn’t an announcement you’ll see yet; however, we will quickly follow up with our plans, which I believe will fulfill a strong market demand.

Regarding your question about EBITDA, I have discussed some key factors in the prepared remarks. We will continue to highlight elements that will impact comparability throughout the year. Starting with the studio segment, we've covered the game release schedule from last year and this year, and on the film side, it remains a business driven by hits. Last year was a prime example, marking the greatest success in the film studio's history alongside significant challenges in the superhero genre. There isn’t much more to add at this moment. For D2C, which is our top priority for growth, we are focused on maintaining profitability. As mentioned previously, we’ve restructured the business and delivered $2.2 billion in profit improvement over the last 12 months. Going forward, our focus will shift; we’re not returning to subscriber growth at any cost, but instead, we aim to enable profitable top-line growth, which will guide us this year and beyond. We have a target of $1 billion to achieve before 2025, and JB and the team will be establishing crucial foundations this year. We’ve intentionally avoided providing a specific target because we are not managing the business based on the results of individual quarters or fiscal years. Our goal is to act in the best interest of the company, especially on the D2C front. This may involve making decisions throughout the year to scale back in certain markets, accelerate in others, or respond to how consumers are engaging with our content. You can trust that we'll prioritize long-term asset value and value generation over short-term profitability tied to individual quarters or fiscal years.

Just one point on that. We have the ability to maintain a profitable streaming business while continuing to grow it this year as we launch in multiple markets globally, invest in building the brand, marketing our programming, and establishing infrastructure worldwide. We view this year as a continued development as we move towards reaching $1 billion in streaming next year.

Right. And then just to finish up the segments here on the linear side, I mean, you heard us talk about what we're seeing right now, and that is a more optimistic view than we have had throughout most of the past 21 months since we closed this deal, but at the same time, I don't have a crystal ball, and we were not in the business of making longer-term projections here. We're going to be as transparent as we can and as much detail as we can about what we're seeing, and we'll continue doing that as we go through the year. What really matters to me is we're going to continue to be very focused on delevering the company. I told you that against the $6.2 billion of cash generated last year, we're off to a strong start in Q1. January was very good. We're going to continue focusing. And I do think that we're still in the early innings here. We have an entire organization with 35,000 people changing their view on how we run the company, how we deploy capital and what we're optimizing for. That's going to have dividends for us for many, many years. So we'll continue to delever, we're committed to our 2.5 times to 3 times target range. And you'll continue to hear us talk about free cash flow generation.

Free cash flow is an important measure for us. We noted that we generated $6.2 billion in free cash flow, along with a 60% conversion rate, during a year when we significantly reduced the sale of our content to third parties. There was nearly a $1 billion year-over-year decline in content sales. We believe this approach is in the best interest of the business in the long run. Our focus is on increasing free cash flow and reducing debt. This year, you will see improvements in our free cash flow and a stronger balance sheet, which will make us a healthier company. Coupled with our exceptional content and talented creators at Warner, Max, and HBO, as well as exciting upcoming projects, we feel confident in our ability to stand out in the market.

Thanks, good morning. Achieving the free cash flow target indicates a strong year, especially considering the impact of the strike. Can you provide an indication of whether you can exceed the $6.2 billion, accounting for the normalization of the billion? Is hitting the mid-5s feasible? Additionally, as you consider your free cash flow generation and efforts to reduce debt, this raises questions about capital allocation, such as the potential for stock buybacks, as well as opportunities for both organic and external growth. Are there specific assets you feel are fully covered, or are there others in the market that could be worth considering?

Let me start with the free cash flow question and the view on investment priorities. So I did go through in my prepared remarks some of the puts and takes, and I deliberately do not want to give a specific quantitative free cash flow guidance. We did call out the fact that there was $1 billion of a benefit last year, and that is going to reverse in 2024. There's no question about it. I also took you through some of the below-the-line helpers here, interest expense and cash out is going to come down. CapEx is going to come down. Restructuring expenses are going to come down. And as I said, we will continue to be very, very focused on capital efficiency. And some of that impact is not going to be individual quarters, but it's a longer-term process. And we have already very significantly changed the approach to our investment decision-making and a harmonized process across the entire company. So I have a lot of confidence that these will be very positive contributions over the coming years. And as I said before, I'm not in a position this year to give very specific EBITDA or cash conversion guidance. We'll be very, very focused on it. We still believe that our long-term target of 60% cash conversion is very doable, very achievable. We will take into account all of that in our ongoing discussions.

We are focused on operating our companies efficiently and ensuring they collaborate effectively while striving to generate and grow free cash flow across each business. This past year, we benefited from the strikes. We are open to considering external transactions or assets that make sense for our investment strategy. Our priority is to maintain a healthy balance sheet, reduce debt to below four times leveraged, and strictly monitor our spending to enhance free cash flow. We have established ourselves as a strong company led by an excellent leadership team with a clear vision. Our asset portfolio is impressive, and we stand out as a pure storytelling company that operates across all platforms. We believe we possess the best set of franchise content assets. Looking ahead, with Max now being profitable, we are optimistic about our growth potential. While we will explore other asset options, our current threshold for such opportunities is high. We are satisfied with our current position and strategy, particularly in building Max and leveraging our outstanding creative assets.

Next question, please.

Thank you. So maybe switching gears to advertising, you mentioned a few times that Q1, you're starting to see strength. Can you just give us some color on where it's coming from? How confident you are that this will continue throughout the year, particularly in light of all the increases in inventory, whether it's Amazon coming to the business, Walmart with VIZIO? And then as a follow-up, you mentioned some market launches in some pretty big countries, UK, Germany, Italy, Australia, Japan. Can you just talk about the timing? Some of these markets have limitations, like the UK. And then lastly, any color that you can give on third-party content sales or your views on that? There's just no way, given your library, that you can use all this content on Max.

Let me take the first question and provide some insight on advertising. As mentioned in our prepared remarks, we have seen improvements in the first quarter across the board. In the US, we are benefiting from improved ratings trends observed in the second half of last year, and we are starting to monetize that. The upfront deals are coming into play, and our strategy this year is different from last year, leading to visible improvements overall. While I don’t want to make predictions for the remainder of the year, we have significant growth priorities ahead. We are catching up in advanced advertising revenues, and the team has made structural changes to better leverage the data from Warner Bros. Discovery. Upfront cancellations are now less of a concern. In terms of the US market, excluding streaming, which is growing over 50%, internationally it’s a mixed picture since there’s no single international market, but key markets like Poland are performing exceptionally well. We have strong network positions there, and Italy has seen an uptick in programming, making us the fastest-growing group in that market, which is positively impacting our advertising. Even in markets that have underperformed for us in the past, such as the UK and the Nordics, performance is now much more stable than in the fourth quarter. Although we are only seven weeks into the year and I don’t want to speculate, we are in a significantly better position than before.

On the Max side, in terms of the international rollouts, one of the things that is often misunderstood when people look at our subscriber numbers compared to our larger peers is that our target addressable market is less than half the size of theirs. This means we still have twice the addressable market to pursue. We are looking forward to 2024 as we expect to return to growth in new market rollouts, which will be the first time in two years since we have been focused on refining our platform and technology in the US. The Latin America launch is set for next week, and we will start in Europe in the second quarter with two new markets in France and Belgium. Asia and Australasia are expected to follow around 2025, while other European markets are more likely to start in 2026. This timeline is how we foresee the rollout progressing, and we believe it will provide significant momentum for both subscriber and revenue growth in the next 24 months.

And then Jessica, on the third-party sales, and I'll let David weigh in as well, of course, but we are doing exactly what we said we were going to do. There is no rigid approach with regards to warehousing all of our content on Max or not doing business with competitors. We are one of the greatest makers of content in the world, and we serve our own platforms and we serve third-party platforms. And the honest answer is, I can give you a sort of high-level direction. We're looking at this case by case, and we've got a process in place. We have the best possible view now on what the strategic, the financial merits of exploitation of our own platforms versus partial exploitation with third parties are. And we have healthy discussions. And what you will notice is we've haven't sold anything since we closed the Warner Bros. Discovery merger. We have done some co-exclusive deals, and that makes a lot of sense. We've got all the data. We know exactly what we're giving up, and we know exactly what we're winning. Now, at the same time, we are having tough discussions internally. We look at the data together and there are definitely certain red lines, and David makes sure that we never cross them. But in other cases, we've gone with some deals that have garnered some press attention and that I am very, very happy with because we're doing the right thing. We're providing oxygen to our content and we're optimizing returns here, not only for the company or shareholders, but also for the talent that we're working with. We are doing the best we can to make those great stories and monetize them in the best possible way.

Gunnar pointed out that when we sell content, we do so exclusively to retain everything. We don't want to sell anything from Max that wouldn't still be available on Max. I would categorize this into two areas. Channing is actively re-engaging with our Warner Bros. Television business. We currently have over 100 series, including some of the best on television like Shrinking, Abbott Elementary, and Ted Lasso. We also have top talent on the TV side collaborating with us, and we believe there will be significant opportunities ahead. Regarding our library, we are very proactive at the lower end. There are major branded programs that represent the essence of our company. These will remain with us, and while you've seen some prominent shows, most have been established for a long time and have already been syndicated on other platforms, allowing us to generate considerable revenue. That's where our focus will be. We likely possess the largest motion picture and TV library globally, and our goal is to explore various ways to monetize it effectively.

Next question.

Thank you. Good morning. Maybe for JB, just to follow-up on the direct-to-consumer Max strategy. You listed UK, Italy, Germany. I know those are Sky licensing deals. I'm assuming Australia, Japan have similar structures. So have you guys made the decision to sort of move out of those relationships and go direct to consumer? Or maybe you could just talk about your thoughts because you have had some nice deals in those markets in the past. And then for JB and maybe Gunnar, however you want to address it, great news to hear on the NBA conversations. Clearly, that would be a big positive to retain those rights. How do you think about making that work financially for the company? It's not a big debate that linear TV is under pressure on the revenue side, and I think it's probably safe to say the NBA costs are going to go up. So how do you guys approach this from a kind of a P&L point of view when you think about exploiting the NBA for what I imagine will be another long-term deal? Thanks so much.

Thank you, Ben. The UK, Germany, and Italy are important markets for us, as we've mentioned over the past year. We have partnerships in those regions with Sky, which has been an excellent collaborator and will continue to be. However, establishing our direct-to-consumer product in these markets is a key strategic goal. We're actively engaged in these areas, particularly in the UK with our Discovery+ product, where we are a leader in sports through our partnership with BT, now rebranded as TNT Sports, which boasts millions of subscribers. This collaboration is thriving. We are confident that entering these markets with our extensive content library will yield strong results, as demonstrated by the viewer ratings and market share in the UK, Germany, and Italy. We believe these ventures will become significant business opportunities for us and will help increase our revenues and subscriber base, starting in 2026.

I would add that what has been particularly exciting for our international rollouts is that, as David pointed out in his remarks, we have several distribution partners in these markets who are eager to help us accelerate our entry and scale. Partnering with them can lead to significant marketing efficiencies and allow us to scale quickly. These discussions are promising and economically, I believe this transition from a licensed model to a direct-to-consumer model will be very beneficial for us.

And then Ben, regarding the NBA, as you know, we are currently in exclusive discussions, so I want to elevate the conversation to a general overview of our approach to sports rights. We are investing nearly $20 billion in content and programming broadly, and every dollar we allocate has a unique purpose across our portfolio. We generally prefer to own our content, which is not the case for sports, but we recognize the immense value—both in reach and emotion—of these deals. We have successfully negotiated profitable agreements while maintaining our discipline. It is easy to lose control over sports rights investments, but that is not our approach. We clearly understand the value we assign and remain disciplined during negotiations. Considering this, we see significant potential to enhance our efficiency in overall content spending across the company, which will include certain areas where inflation is a likely factor going forward. Specifically for the NBA, we have maintained a strong partnership for 40 years, and I am hopeful we can continue this relationship in a positive manner.

Let's see if we have time for one more quick one.

Thanks. Good morning. Two for you guys quickly, if I can. David, you've been vocal about the idea of rebundling. Do you think it's inevitable that the digital streaming ecosystem will end up looking a lot like the old MVPD world? And maybe if you can talk about the benefit of bundling Max with other streaming services like Netflix through Verizon. And then for JB or Gunnar, can you talk about the future of Bleacher Report sports add-on product, given the sports JV announcement and anything you can share in terms of the engagement with sports on Max to date with the free option? Thanks so much.

Thanks, Robert. I believe everything revolves around the consumer experience, which currently feels cluttered, awkward, and confusing. People have adapted to this by searching for shows or sports online, but rebundling makes a lot of sense. We have moved past the idea of subscribing at any cost by making Max profitable and focusing on attracting genuine subscribers with sustainable economics, treating it like a legitimate business. The convenience for consumers to find everything in one place, such as with the Verizon example, is significant. Combining Netflix with Max creates a meaningful experience and simplifies navigation across both platforms. In the long run, I anticipate substantial bundling will occur. This could happen through an intermediary like Apple, Amazon, or Roku, or through initiatives from Charter and Comcast, which are beneficial for the content industry as they aim to create more straightforward and stress-free content discovery. Alternatively, we could pursue this ourselves, which I have always supported. We are working on domestic and international bundling initiatives. The sports venture is designed to address this need; when our product is combined with Lachlan and Fox’s offerings as well as ESPN’s, it results in a smoother and simpler consumer experience. There won’t be any confusion about which channel to find something on or whether you have access. Everything will be in one centralized location, and I believe that consumers will increasingly prefer this approach.

I believe Robert, regarding the B/R Sports aspect of your question, it aligns perfectly with what David mentioned. We are looking at the overall sports venture and how partners can bundle it with their existing streaming services. In our case, combining it with Max enhances the experience for consumers, making it much simpler. As for what this means for the existing B/R Sports on Max, we will have more information to share in the coming months as we approach the venture's launch. It is exciting to be able to combine the exceptional entertainment available on Max with the streamlined and appealing offering from the joint venture and present them together attractively to subscribers. Additionally, we are committed to enhancing the Bleacher Report sports offering and are thrilled to showcase all of our March Madness content, including the build-up to the Final Four on Max for the first time within the next 45 days, and then later into the NBA playoffs this spring.