Warner Bros. Discovery Inc (WBD) — Q2 2025 Earnings Call Transcript

Good morning, and thank you for joining us for Warner Bros. Discovery's Q2 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 made 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. In addition, we will discuss non-GAAP financial measures on this call. Reconciliations of these non-GAAP financial measures to the accepted measures can be found in our earnings release and in our trending schedules, which can be found in the Investor Relations section of our website. And with that, I'm pleased to turn the call over to David.

Good morning, and thank you all for joining us. Our top strategic objectives have always been clear: to be the premier home for the world's most creative talent both in front of and behind the camera, to operate as the world's largest, highest-quality maker and producer of film and television, and to distribute those stories to audiences worldwide through a globally scaled, profitable streaming service. In the second quarter and in the early weeks of the third quarter, Warner Bros. led with strong momentum in delivering on all three of those objectives. We're seeing that momentum at Motion Pictures, where Warner Bros. became the first studio ever to open five consecutive films with more than $45 million in domestic box office. We're seeing that at the Emmys, where Warner Bros. TV led all studios in nominations and HBO set a new record with 142 nominations. We're seeing it in the strong critical and fan response to Superman, which begins an exciting new era for DC Studios, and we're thrilled to share that James Gunn is already writing and preparing to direct the next installment within the Super Family. Additionally, we're seeing it at HBO Max, which again added more than 3.4 million subscribers in Q2 as it continues to launch in markets around the world. This pattern of creative success is the result of a three-plus year attack plan aimed at enhancing every dimension of our creative culture and storytelling business. From HBO to Warner Bros. Television to Warner Bros. Pictures, and from animation to DC Studios, we've invested in our creators' creative and operational capabilities. As a result, our Studios business is now on track to deliver at least $2.4 billion in adjusted EBITDA in 2025 with our sights set on our $3 billion goal. We have transformed HBO Max and have our Streaming business on track to exceed $1.3 billion in adjusted EBITDA in 2025 and reach over 150 million subscribers by the end of 2026. From CNN to TNT Sports, we are bringing innovation to news, sports and unscripted programming as we work to optimize our global networks. All the while, we've dramatically deleveraged our balance sheet from over 5x net leverage to 3.3x now, the lowest since our merger closed. As we continue to navigate generational disruption and move forward with splitting into two independent publicly traded companies in 2026, our current momentum will help position both future organizations for long-term success. With that, we look forward to your questions.

I have one question for each company, Warner Bros. and Discovery. Can you talk about your content licensing strategies? David, you shared in the letter that the $5 billion annual library revenues from Warner Bros. TV and Film and balancing that trade-off. So would you be more open to licensing the Warner Bros. and HBO content to third-party streamers now going forward? And then for Gunnar, can you talk about your approach to overall content licensing, but especially with regards to your sports rights especially in light of the potential of sublicensing these rights to ESPN or other streamers.

Thanks, Robert. Well, look, one of the great building blocks of our studio business is we have the largest TV and motion picture library in the world. And that is like a long-cycle business that we can look at as a steady stream. Having said that, we've made a number of judgments, including this year, where we've opted to sell significantly less than we could into the streaming market as well as the traditional market, because we're seeing such growth and we're driving towards such growth for our Studio business, which includes our streaming HBO Max. We think in order to differentiate HBO Max, it's important that there are a wealth of quality properties that reinforce you only get this at HBO Max. And that's working for us in terms of driving growth. It's working for us as people more and more see HBO Max as the premier quality service around the world and storytelling. So it's really a decision to fight for asset value and growth rather than near-term value. And we did walk away and I expect that we will continue to because we're seeing very good trends as we grow around the world.

Yes. And Robert, maybe just to add one point to what David said, and we try to shed a little bit of light on this in our letter this quarter as well. It is important to understand that we have very significantly shifted the mix between external and internal content sales over the past three years. That has sort of put pressure on our near-term financial results, but we have put a 10-digit figure of value in terms of intercompany profits parked on the balance sheet. That's going to come back into the P&L over the next few years as JB utilizes these contents and can utilize this content on the HBO Max platform. So we have taken a short-term financial hit for some real value that's going to flow through, and that's a significant amount.

One of the key advantages of operating Warner as a unified company is that HBO was known for its exceptional storytelling, while Warner Bros. Television excelled in producing TV series. However, they rarely collaborated. Now, with Channing and Casey working together, we have innovated with The Pitt, a procedural that has proven very successful for us, and it will return in January, nine months after the first 15 episodes aired. They are also collaborating with J.K. Rowling on Harry Potter, which shows strong promise and is already in production, with plans for 10 consecutive years. This strategy involves aligning the top TV production company in the world with some of the best work available—not all of it, such as Ted Lasso, Shrinking, Presumed Innocent. We create a lot of content for others, but we are focusing more on coordinating efforts for HBO Max, which will provide additional value and positively contribute to sustainable growth at HBO Max.

For Discovery Global, there were two main topics to address: general content licensing and sports. Let's start with entertainment content. We are reimagining the U.S. Networks portfolio as a content engine focused on strong unscripted brands rather than traditional linear networks. All forms of monetization will play a bigger role, with content licensing being a significant tool for recovering our content investments. Currently, 2024 shows an uptick in our licensing efforts, with 2024 reflecting higher than usual content licensing numbers. In the second half of 2024, we recorded $580 million in Networks content sales, which is well above our typical run rate of about $200 million per quarter. This trend will impact our outlook for the remainder of the year and beyond. Regarding sports, we are committed to our sports portfolio, which Luis and the team have effectively restructured over the last two years. We possess a robust portfolio with all key franchises, which will be essential as we operate as a stand-alone entity. We will maintain our disciplined approach to investments and are unlikely to sublicense our rights. Recently, our involvement in the college football playoffs increased from two games this year to five games next year, indicating our commitment to expanding our offerings. I don’t see a reason to sublicense; instead, our team is developing a strategy for utilizing our streaming rights effectively. Our plan is to create a standalone product that we will offer directly to consumers and potentially bundle with HBO Max and Discovery Plus, along with third-party options, all aimed at maximizing content accessibility. There's a lot in progress, so stay tuned for updates.

I have two questions also. David, look, you've been developing a lot and have a lot of franchises. You mentioned Harry Potter, now Superman. Can you talk about what else you see as future franchises and kind of the halo effect that the success can have on the entire organization from theatrical licensing, streaming games, merchandise, etc. And then Gunnar, now that you're becoming the CEO of Global Networks, it's a segment that's obviously been challenged from just the secular challenges. Can you talk about what you see as the like underappreciated opportunity for growth in this business?

Thanks, Jessica. I've always highlighted that one of our key assets is the strong storytelling intellectual property we possess, which is recognized worldwide, including characters like Batman, Superman, Wonder Woman, and franchises like Lord of the Rings. We categorize these as our major tentpoles, like Harry Potter, and then we have smaller yet significant tentpoles such as The Fugitive, Goonies, and Gremlins, which are widely known. Part of our strategy is to strategically promote these major tentpoles, aiming to present two or three each year for stability. We're progressing with a great script for Lord of the Rings with Peter Jackson, and we'll share more details soon. There’s significant work being done on Wonder Woman, and we have a solid DC strategy in place. Essentially, we operate through four studios; one focuses on DC development, which we've discussed. The second studio is Warner, where Mike and Pam are working on IPs like Lord of the Rings, Gremlins, Goonies, and Practical Magic, while also developing new stories like Sinners. We also have New Line Productions, known for its expertise in horror. If you have some free time this weekend, I encourage you to see Weapons; it's an extraordinary experience. New Line is returning to its strengths, and we anticipate producing several films annually, along with comedies that are part of New Line's legacy. In animation, we have Cat in the Hat launching in January with Bill Damaschke. Our portfolio is well-balanced and more financially focused. Since many of our intellectual properties have been underutilized—no Superman in 14 years, no Lord of the Rings in 13 years—we have a chance to revive those franchises and introduce new, original stories. We are optimistic about our position. For the Motion Picture Group this year, we are being conservative in our projections because we recognize the audience ultimately decides. We've had an impressive journey, going from last to first in the rankings, thanks to the collaborative efforts of Mike, Pam, DC, and New Line. Disney currently leads slightly, but we are looking forward to a successful weekend, and we see ourselves making a significant turnaround. These past three years of investment are about to pay off with our planned releases that are strategically aligned and cost-conscious. I believe we hold a considerable advantage in our film marketing approach. We've dedicated years to preparing them, and our global strategy has seen success with titles like Barbie, Wonka, and Superman. We also had a unique opportunity with Apple for F1. Overall, I believe we have real momentum going forward.

Okay. And Jessica, on the global network side, look, it's a legitimate question, of course, and the #1 question maybe. I have to tell you the thing that excites me the most about the future here is I will have the privilege to work with maybe the greatest team I've ever seen in my career. I've known many of these people for years, and it's a team that has a track record of fighting to win. It's a team that's everywhere in the world. I've spent a good part of my time over the past eight weeks traveling around and meeting a lot of the people across the Discovery Global footprint. I can tell you the level of excitement, creativity and energy that's coming through in these meetings is off the charts. One big factor here is that people understand that we're building a group of assets set up to thrive and continue to prosper on a stand-alone basis. We've already talked about the changes we're making to the U.S. sports coming with Discovery Global. Discovery Plus moving over, we have Bleacher Report, and we have an international free-to-air footprint with very different secular trends than what you're seeing here in the U.S. The ability to focus on these assets and nothing else is exciting me and is exciting the team everywhere and with everybody I've spoken to so far. It won't change the secular trends; however, I believe there are very significant pockets of growth and opportunity, and we'll work really hard over the next half year here to identify those and get in position to deliver what I think is a business with much more longevity than what the market sees right now.

I have two questions. First, regarding studio and live events, given all the investments in DC and the early success of the DC reboot, are you reconsidering what DC is doing in terms of theme parks and live events? I know there’s a licensing deal with Six Flags, but in light of the success of Harry Potter at Universal, I’m curious if there’s an opportunity to reassess your efforts with the DC franchises in parks. And then I have a quick follow-up.

Thank you, Michael. We see a significant amount of untapped potential. In general terms, we have considerable room for growth. When we took over three years ago, we were earning approximately $0.22 for every dollar Disney generates by circulating their intellectual property. We're now up to about $0.30. The situation with Harry Potter is different; we have been highly successful in monetizing that through gaming and a very beneficial partnership with Universal and the Harry Potter parks. This has served as a model for us to actively pursue growth. Bruce Campbell is overseeing that segment, and we have announced that he will be the COO of our new business. We believe this represents a substantial growth opportunity. We have reclaimed some of our rights that were previously given to Six Flags and have redefined how we manage DC, which we believe can be very attractive. Many of those rights were not restricted outside the U.S., and we are at various stages of utilizing those assets. We don't plan to build theme parks ourselves, but for certain franchises like Harry Potter, while it's not a theme park, we've seen success with locations like Leavesden and our entry into Japan, both of which have been sold out for over a year. We are considering expansion in either ownership or licensing arrangements. We've already begun a profitable initiative in Abu Dhabi. So, the answer is yes, and it goes beyond just DC and Harry Potter. We demonstrated success with Superman as Bruce and the team effectively utilized the character across various merchandising channels, resulting in significant economic value.

Great. That's very helpful. And then for Gunnar, I was just wondering if you could talk about the comments in the letter related to the HBO Max U.S. distribution deal restructuring. What was the nature of that? And what drives the reacceleration after the first half of '26.

Michael, it's essentially as we laid out in the letter, we had a legacy deal with a former affiliated party, and it's not unusual once those come up for renewal that priorities shift. We've taken a bit of an adjustment on the rates, and we wanted to call it out because it's going to have a meaningful impact on our revenue growth for a 12-month period until we lap this deal. It's also important to note that we expect a reacceleration, not only once we lap this deal, but also from the various market launches that we have in the pipeline beginning in Q1 of 2026.

One quick thing. It's not Saudi Arabia. It's Abu Dhabi. So sorry about that. But go ahead, JB.

Yes. I think in terms of the HBO Max and the streaming profile, as Gunnar said, it will certainly dampen the growth rates for the second half of '25. The reacceleration drivers are going to be starting in the first half of '25, obviously big new international launches coming from Europe. So on a global basis, we'll start to see revenue reaccelerate in the first half and really in the first quarter of '26 and then the U.S. growth will reaccelerate starting in the second half of '26 as we lap that reset.

Can you discuss some of the underlying factors contributing to ARPU, especially since we've noticed some dilution as the year progresses? Additionally, David, what are your thoughts on the pricing power of the MAX product? For Gunnar, with the NBA deal approaching in the fourth quarter, could you provide more insight into its impact on revenue and overall profitability as you transition from that contract?

Let me begin by stating that our primary goal was to establish HBO Max as the leading platform for high-quality storytelling, making it the go-to choice for viewers. Casey and the team, as well as HBO itself, are experiencing unprecedented strength and a wealth of hits. They are enjoying a remarkable streak. Our focus has been not on increasing prices aggressively, but rather on ensuring that the market acknowledges our product's high quality. We aim to improve the experience for users and narrow down access. When customers encounter the best quality in the market, they are more likely to return for the compelling stories, which we believe sets up a significant opportunity to increase prices on our top-tier service over time. JB, could you share some insights on what you are observing in the market and how it may evolve?

Yes. To add on to it, the exciting thing for us is that, post both COVID and the strikes, we've always taken a little while to get our sea legs back and more consistent. The combination of those being through and a refined and much more rigorous content strategy that's based on 52 weeks a year of programming with a constantly iterating and better data sets to look at what's working and what's not working. We feel, as we look ahead at the next 24 months of our slate, '25, as we said on previous calls, the slate was stronger than '24, and '26 looks stronger than '25. As we look at '27, the early parts of '27, the engine just keeps getting better. A lot of that, to David's point, we want to be smart around still making the product affordable and grow penetration in these markets. But at the same time, with the quality of the slates, the return obviously to HBO Max as a brand and what that stands for from a premium standpoint, we do think there is obviously meaningful growth also coming from price acceleration over the next couple of years.

Right. And then on the NBA deal, look, as a reminder, obviously, for many of these sports rights, the main monetization engine is the affiliate revenue. If you look at just advertising and content cost as a differential, those deals are loss-making from that perspective, right? There is going to be a benefit from the NBA coming out of our financials. If you think about how the season plays typically over the quarters, it's important to note that Q2 with the playoffs is by far the biggest chunk, both of content costs and revenue generation on the ad sales side followed by Q1, while the smallest quarter is Q4. With that in mind, and the fact that we have reinvested some of the savings into other sports rights. We mentioned college football playoffs already big 12 in the fourth quarter. What you can expect is roughly $100 million sports cost benefit in the fourth quarter. As we turn to 2026, there will be a net benefit of hundreds of millions of dollars from the rights cost coming out and some offsetting revenue losses from an EBITDA perspective, so a very significant improvement.

I wanted to ask JB, as we look at the streaming landscape, there's been a clear push towards wholesaling to MVPDs. I'm curious does the engagement look for those ad-supported subs that you're bringing on versus those that sign up for HBO Max directly? Are you thinking about how you market to those subscribers who may not even realize they have Max because it seems like there's a substantial advertising opportunity if you can engage those wholesale subs in the service and certainly in the app. And then just for David, one of your oldest pieces of IP that probably doesn't generate a lot of revenue is going to be getting a pretty big makeover in a few weeks. I'm curious whether you've seen Wizard of Oz in the Sphere, and any thoughts would be great.

Let me start with Wizard of Oz. Jimmy Dolan, in the spirit of the great Chuck Dolan as an entrepreneur, I've been to the Sphere many times. I've seen the smaller Sphere's version of Wizard of Oz. We collaborate with them, and they deserve the credit, which goes to Warner Bros. and our extensive library. We are also exploring our own project related to Wizard of Oz, which we will discuss at a later time. It feels fantastic, very exciting, and truly innovative, with the premiere at the Sphere on the 28th. So, it is quite thrilling. JB?

Yes, Rich, regarding the wholesale partnerships, I have a few thoughts. First, when we evaluate these deals, we focus on the lifetime value and net average revenue per user, considering how we intend to acquire those retail subscribers. Each deal begins with a strong lifetime value profile for wholesale subscribers compared to our retail expectations and acquisition costs. This is fundamental to our approach. We are also increasingly collaborating with various MVPDs and non-MVPD partners on activation efforts, dedicating more time to work with their customer service and user experience teams on product activation. We have observed significant improvements in activation across the board. In our largest recent partnerships, both in the U.S. and internationally, we are seeing activation rates exceed our expectations. After activation, engagement is influenced by in-app marketing, merchandising, and ongoing partner marketing. We've noticed that most of these deals come with upsell opportunities, allowing us to transition customers from an ad-lite product to ad-free options, which increases our average revenue per user, especially internationally where ad sales remain a developing sector from a smaller base. We have a comprehensive plan in place, with a global team focusing on trade marketing and partnerships to enhance activation and engagement. We are experiencing notable growth and acceleration in these areas as we pursue these deals worldwide.

The only thing I would add is that it's different in different markets. For instance, in the U.K., a majority of programming outside of sports on Sky that was loved was HBO programming. Some markets where people have been watching The Last of Us, Euphoria, White Lotus, House of the Dragon, it was on a different platform. Now it’s going to move to HBO Max. You'd expect in that case, when you have a huge engaged population that has been watching through that, that group will be spending a lot more time watching. We're seeing that in Australia. When it's available on a platform like HBO Max, the retail picks up significantly because it's like a marketing vehicle to say, 'Oh, HBO Max is here.' JB has been seeing that in Australia, and we're getting very powerful pull-through in terms of consumer demand in the U.K., Germany and Italy, and we're in a lot of discussions in Italy and Germany as well as we’re nonexclusive in the U.K. You'll see those markets quite powerful coming into next year because it has that unusual dynamic of an embedded audience. JB, I don't know if you want to add a little more to that on Australia, what we're seeing practically.

No. That's right. In Australia, the launch was essentially a dual track launch, but we're going to obviously retail as well as through our partnership with Foxtel, which is, as David has mentioned, our long-standing licensing partner. We love that double track of fishing in a pond that's already stocked with our wholesale partners with good economics. We're going direct in a smart way to expand the reach of the product. Australia has been a great success story for us in these early months, and we exceeded our expectations. It makes us even more bullish on what we expect to see in the beginning of next year as we launch in these big European markets.

As you went through your upfront advertising negotiations granted you still have a combined company for the next year, but how are you contemplating addressing marketers' desire to advertise across platforms? Do you have something, some structure in place to sell the advertising on streaming and your global networks?

Yes. David, it's a great point. That's one of the areas that we looked at really hard as we contemplated the separation. We concluded, and we've said publicly, we're going to continue to go to the market as business as usual. We will have a structure in place. This is one of the areas where there is significant synergy. When we announced the separation, we made clear that after all that hard work went into generating the synergy, we're going to continue to work as hard to maintain a synergy opportunity where it is present. Ad sales is definitely one of those areas. So nothing is going to change from an advertiser perspective, and we're working through the process to set that up internally. With the upfront in general, since you mentioned it, we had some concerns going into the year with the macroeconomic and geopolitical environment. The market held up very well. We've seen prices up across all categories, more so in sports than in general entertainment. On the digital side, there is some price pressure, but we've maintained a very strong price premium for the quality of inventory that we're delivering. Net-net, I'm very happy with the outcome.

JB, I was wondering if you would comment on where the business is and bringing churn down to what you view as a healthy, sustainable level. And also how you're going about driving that churn down. And then, I guess, somewhat related, I was hoping you could provide an update on where you are in the effort to convert unauthorized account shares into paying customers? What inning would you say you're in there? And how meaningful do you see that opportunity as you go forward?

I’ll begin by addressing the issue of account sharing. We believe we are just starting this process. Over the past several months, we've focused on refining our data to identify legitimate users versus those who may not be. We have also ensured that we thoroughly tested these methods so that when we introduce stricter measures, we are positioned correctly. We are confident in our progress. Beginning in September, you'll notice a shift in our messaging from a softer approach to a more defined one that requires users to take action, as opposed to the current voluntary process. The significant benefits are expected to materialize in the fourth quarter, with greater effects expected in 2026 as we intensify our messaging and execution beginning this fall. Regarding churn, we are actively working on reducing it. There are several strategies we are employing. As you've heard from David and the rest of the team, bundles have proven to be critical. We’ve had success here in the U.S. and are now in discussions with other major streamers internationally. Users who take advantage of bundles often see churn reduced significantly, sometimes by half or more, while their lifetime value can be twice as much or greater. This is one successful avenue for increasing lifetime value and reducing churn. Engagement continues to be paramount, chiefly driven by content. While we've had stellar content over the last few years, we are moving towards a more consistent schedule throughout the year. Our aim is to transition subscribers effectively from one content offering to another while managing programming and scheduling more aggressively to minimize gaps. There is still considerable work ahead concerning the product itself and enhancing personalization. We’ve made strides from having a subpar product to one that is good, but we recognize we still need improvements in our features. Each month, we are rolling out new features and conducting A/B tests to elevate the product from good to great. Although we've seen encouraging improvements in churn earlier this year, we aren't content with our current standing and will continue to address it aggressively through enhancements in product, content, and all our marketing strategies.

I wanted to ask you, David, about your better together view for DTC. At this point, it seems like it was present as the industry has continued to expand bundling. Could you discuss the contribution to gross adds and maybe the churn of your wholesale or third-party strategy in contrast that to your retail strategy? Also, comment on how the partnership with Disney has tracked versus your expectations?

Thank you, Peter. I believe that one major factor driving better outcomes is common sense and a broader selection that appeals to a wider audience, with the consumer experience being paramount. When you turn on your TV or device, you face 18 apps and end up searching for your show, sports, or movie. Our research shows that while people have adjusted to this setup, it's still a cumbersome experience. This has been a significant focus for us over the past three years as we aim to become a truly global player. Currently, only a handful of companies, such as Amazon, Netflix, Disney, YouTube, and us, stand out as truly global players. Although YouTube operates differently now, they maintain a strong global presence. Being global enables us to share content like Harry Potter with billions worldwide. As regional players consider the costs associated with building platforms and how we differentiate ourselves, it's evident that our strength lies in unity. In regions like Latin America, a collaborative approach enhances consumer experiences; we have local content and sports in Brazil, while our partners have vast amounts of local offerings, leading to high-quality content that resonates with audiences. This is similarly true across Europe. Improving the consumer experience is crucial, and I anticipate that in four to five years, we won't be seeing 18 apps anymore. The companies that thrive will likely be the global ones, though there may be some regional players that manage to turn a profit. Many smaller players are looking to join global enterprises. We notice this trend accelerating; it may begin with bundling, which has proven effective. Our partnership with Disney is outperforming our expectations. It's more than just reducing churn; it's about consumer satisfaction and experience. We have unique audience segments that they don’t and vice versa, making it mutually beneficial. Some consolidation will occur in certain markets, and some companies will opt out of losing money and focus instead on creating content, leaving the direct-to-consumer battle to the global leaders.