Warner Bros. Discovery, Inc. (WBD) Earnings Call Transcript & Summary

We're glad to have David Zaslav, CEO of Discovery. I would say, last year, you've got the highest marks for being the most engaging speaker, so...

Let me try -- and I'll try and match that.

Yes, you got to match that.

Now for the record, last year, we were the #1 performing media company. And this year, in 2019, thanks to you guys, we still think we're madly undervalued. But we were -- Disney was up 32 point -- 31.7, and we were up 32. So we were, 2 years in a row, the best-performing media company.

That's good. That's a good place to start. Now you're going to do...

Probably we're going to do a -- all right. Let's -- this gives you a little bit of a sense of who we are, so let's run our corporate video.

All right. [Presentation]

All right. That's great. So let me ask you a question since you started off talking about the performance of your equity over the last couple of years. As you chat with investors, what do you think it is? What is the underlying driver of that equity performance over the last 2 years that has allowed your stock to perform so well? And what does that mean as you sort of think about what you need to do in the future to sort of keep the equity performing as well as it has?

The equity has performed well on the one hand, but we do think that we're meaningfully undervalued, and we think those 2 things could happen at once. The reason I think that we performed well is it's -- we've really been a story of promises made and promises kept. We acquired Scripps. We said that we were acquiring an IP company that we could take that content around the world. That together, we could have a much stronger hand with women. We now have the top 3 channels for women in America, Oprah is the #1 channel for African-American women. So our ability to deliver women was going to be stronger. But on pure metrics, we were generating $1.4 billion in free cash flow. They were generating $700 million. And we said over the next few years, we think we can get to $3 billion in free cash flow. In 2019, 18 months after we did the transaction, we're one company with the best leadership of both, and we generated over $3 billion in free cash flow that we'll report when we report our earnings. We paid back $4.2 billion of debt. We were 4.8x levered. We're now 3x levered. And we bought back about $650 million worth of stock. And so...

Sorry, that $650 million is what? In 2019? Is it...

Between -- it includes -- yes, in 2019. And so when you think about it, we spent $15 billion on Scripps, $4.2 billion in repaid debt, buyback of about $650 million. That $15 billion is now $10 billion. We're generating -- we were generating about $2 billion of free cash flow. We're now generating more than $3 billion. And we're growing. As you look at media companies around the world, our international business is growing, again, partly because of Scripps, a big piece because a lot of our direct-to-consumer content and products are working or starting to work in a meaningful way. And so we look like a mid-single-digit -- low to mid, but leaning toward a mid-single-digit growth company with -- that's free cash flow machine, own all of our content, diversified around the world in sports, entertainment and nonfiction. And so we look at it and we think, when we did the Scripps deal, we were $27 or $28. Up until like 4 months ago, that's where we were with all of that performance. And so yes, we've outperformed everybody. But I think part of it is that I think we're -- we've got a fantastic leadership team, and we're outperforming all of our peers, and we've done everything we've said. I think this is the year that we start to get some credit. Disney has gotten full credit. They deserve it. They're a great company, and their IP is recognized as having -- not having little terminal value issue, that they own great IP. And we own great IP, and our job is to -- through a lot of the initiatives we'll talk about today and that we're going to continue to drive for the marketplace to recognize that we have this free cash flow and low to mid-single-digit growth and diversification. But we're actually -- we invested several hundred million dollars on top of all those numbers in a lot of new initiatives, whether it's golf or cycling or our cooking, our food network kitchen or our aggregated in-country language, SVOD products across Europe. So that's our job. And I think that if we can begin to do that, then in addition to viewing us as a free cash flow company, we're going to be seen as a company of the future, an IP company that has more global IP in language than any media company in the world. And that's -- so we're hoping that this will be the year that we can convince you guys of that.

See, that's so interesting to me. Because if your stock and Disney stock was up the same amount last year, Disney seemed to me to be more about sort of a strategic pivot and the market beginning to ascribe a high EV on sort of the terminal year of their DTC pivot. Yours actually seems to be harder to accomplish because it's all about generating EBITDA, generating free cash flow, paying down debt, right, where...

I would view it the opposite that they've been given all the credit now. The assumption is that they're going to have 150 million subscribers. The assumption right now is we're not going to have any. And so to the extent that we can prove out that our products with cars, with cooking in the kitchen, with in-language across Europe, to the extent those start to go. We're valued really now as a traditional media company, free-to-air and cable. That's a very -- that has a very efficient conversion to free cash flow and a steady source and predictable source of -- at least for the next few years. I mean there was -- a lot of this year, we were valued as if 4 to 5 years from now, we really wouldn't exist. Whereas our debt, we have 40-year debt at 3% or 4%.

Right. Let me ask a question. You touched on...

Some of which Brad Singer put in place. Our former CFO is here. I'm going to get the full critique of this little presentation afterward from Brad.

Five times [indiscernible] investing your life.

That was all Brad's comments, actually. Can I go back to what you said about leverage? You said you're at that low end of your target, 3.5 to 4, and you talked about some of the stock buybacks that began...

3 to 3.5.

3 to 3.5?

Is really -- and 3 is our -- is what we've said as kind of the low and our optimal, yes.

When I read the press, there's just a lot of sort of [ odd ], I would say, about the quantum of debt, sort of at the federal level, at the corporate level, maybe less with the household level. As you sort of look forward, do you think it's reasonable that you'll take your target leverage down? Or do you think as you generate cash flow, most of that money will be used for buybacks to shrink the share count?

Well, I wouldn't say exactly what they're going to be used for. Optimally, we have an asset within the company that we think is -- has really meaningful strategic opportunity. And if you look across Europe, you have Netflix, a terrific product. It's almost all English language content, and they do a little bit of in-country language content peppered in. You have HBO which mostly just movies, and it's American content. You have Disney, terrific. Great product, great IP. It's American content that people love. Our venture in Germany is a great example. We're partnered with ProSieben. And in 6 months, we have 7 million active users on our joint product. It's basically a Netflix or Hulu in-language. We now have Dplay all across Northern Europe, and we're launching it in -- JB Perrette is here. We're launching it across Europe. And what we have found, not that we went into a conference room and got real smart about it, but we've been at this for 4 years. That there's 4 or 5 players that are doing U.S. content, but we have the most in-language content than any company in the world. We're in 200 countries. We hired Peter Faricy and Avi and a whole team of engineers, and we built our own platform. And so we think that it's starting to scale across Europe, that we could have a very big in-language Netflix business. We did a deal with Polsat, where in Poland, we have about a 35%, 40% share. They have about a 35% share. Together, we have 70% to 70% -- about 70% of all of the local content in Poland. And together, we're going to be offering that. So Netflix will say, "Here's my product." HBO will say, "Here is my product." Disney is going to say, "Here's my product." But the one thing I've learned in my 15 -- almost 15 years at Discovery is local is the most important thing.

I'm so glad you say that because I -- we're not recommending Netflix this year. Some people ask me all the time, why not? And I say, content is local. It has to be local. There's going to be a limit to the ability to just sort of dub American content around the world. And I get no traction with that thesis at all on the buy side. I think you're 100% right, but I'm just saying that -- it's...

So you and I have to convince more...

Yes, we have to convince more...

But the good news about that is, when we look over our shoulder, it's us. So if you're a big broadcaster in one of the markets in Europe, you can go ahead and build a platform. You could hire the group of people that we hired and 150 people in Seattle and 100 people in New York and have them build something. But we've already built it. We have an existing platform. And if you want to play this and then they look and they go, you're doing great in Norway and Denmark. We're the fastest-growing AVOD/SVOD product in Norway, Denmark and Sweden. We're the fastest-growing product in Germany. And so I'm glad that everyone is focused on this big scripted movie U.S. play because our strategy is let's attack Europe. And we've already started to attack Latin America. We're working real hard in Chile and Peru. And so we think this local language is going to be really potent. And the thing that we've started to add to it, which is providing a little bit more traction, is we're the leader in sports in Europe, with Eurosport and the Olympics. So we have cycling and the golf. And so if you remember back to HBO and HBO Sports. So you come to Dplay in Northern Europe. And once you come into Dplay to get all this, let's say, of 35% -- 25%, 35%, 40% share of entertainment and local content and news, you come into that. And then on top of that, you could get all the tennis majors. You can get the golf, you can get the Olympics, you can get cycling. And so it's sort of like HBO, HBO sports. And that -- we're looking at the way that's scaling, and we're pretty excited about it. And if that thesis ends up being correct, then everyone will have fought over the U.S. scripted and movies. But it is hard for anyone to play in that space because we've spent all these years building local content in every one of these countries. We have local people in every country. We have local salespeople. It's pretty hard to replicate that.

Do we have a survey question for the audience? Let's see what the first one is here. Oh, that's the wrong company. You're going to have to scroll through 3 questions to get to Discovery. I think most investors think we need to see more...

I am on the Board of Sirius, I'm not going to answer that question. I'm going to leave that to Jim Meyer, who's a great guy. We were together last night.

So most investors broadly think there needs to be more consolidation in the media sector, that we're not done. The Discovery/Scripps, the Disney/Fox, the CBS/Viacom, there has to be more. Do you agree with that as a principle? Do you think the buy side is on the right track? Or do you think we're done?

I think if you view scripted series and scripted movies as a category, which I do, and you say that's like an apple pie, everybody just has a piece of that pie, and all of them don't have enough. And so that's why when something becomes available, big bang, every one of the players goes into, "Oh, no. We're going to have it." Because our piece right now, I'm not sure our piece is big enough for someone to buy. They're going to want a bigger piece of the pie. Is HBO Max bigger than us? Is Disney bigger than us? Is Peacock bigger? But they're all fighting over the same apple pie. And I think a few of them, they're not -- it is not going to be 5 or 6 or 7 of those players. Right now, they're bidding up the cost of the content. They're bidding up the cost of the talent. They each got to try and market. They got to get -- and so I think they're not that differentiated. Now they've -- a lot of them are just talking about the particular series they have at the time that'll be turned around from one to another. So I think there will probably only be 2 or 3 winner, and I think a few of them are just going to absolutely tip over. The way -- how much can you pay for Seinfeld? And one after another. And so we feel very good about the fact that there are great companies, well financed, that are pushing like hell in that space. And there is -- and we're in this better field, and so our content really is differentiated. And so for instance, if we put together an aggregated product in the U.S., so where Disney has Pixar or Marvel.

Lucas.

Lucas. Those are buttons for curation. And so Disney has done a great job. And if you have a family, you absolutely love Disney. And if you're a superfan of Marvel or Star Wars, you love Disney. But there's a big piece of America that's neither of those things. And we -- if you take -- if you took a look at a -- let's assume we developed a product, and you saw Oprah, Chip and Jo, ID, TLC, Discovery, Food, HG, that people curate through that now. I'm looking at Karen Leever, who runs our GO product. It's an authentic -- it's authenticated apps where people can go and consume as much of Food or HG and Discovery, and it's generating several hundred million dollars for us. And the average age is in the 20s. And so what that says to us is I think we have a really differentiated opportunity, and we're looking very hard at this idea if we pull all of our content together, that we have something that's quite compelling for women. We have the top 3 channels for women, as I said. We have great content with Oprah. We're going to have great content with Chip and Jo, who are already producing great content. And then we have -- we did this deal with the BBC, but we did it very purposely because we look with great admiration of what Iger did with Marvel, and he bought the best IP. When people think about that kind of genre, he's got the patina. And you look at what we created, some of what we created with the BBC and they did themselves. But when you put us together, Planet Earth, Frozen Planet, Blue Planet, Walking with Dinosaurs. And we get all that content through 2030, everywhere in the world outside of the U.K. You can imagine us bringing that all to the U.S., the best science, natural history library and saying, we have great content for women that you can curate, and we have the definitive collection of natural history and science brands that no family, nobody should go off to college without seeing the way our folks bought us World Book or Encyclopedia Britannica. We have the definitive collection of science, natural history and space. Everyone should see all the Planet Earth, the Frozen Planet, the Blue Planet. So we look at this marketplace, and there is an argument that they're spending a ton of money, Apple, Disney, doing a great job, and they're behaviorally adapting the U.S. population to buying content and consuming it on platforms. It takes a while. We've been doing it in Europe, and it takes a while. And so in the end, we think that the marketplace, there could be a sweet spot where people have become acclimated to buying and consuming content. They have 8 choices in scripted series and scripted movies, but then they have all the content that they love and the definitive collection of natural history that could be a great companion to every one of those. So we're looking hard at that in the U.S.

Okay. That's interesting. Let's go to the first question. I would love to have a control group where we asked this question before you get your answer and after. So -- but we just did it after. So here's the question. Does Discovery need to be part of a larger media firm? Yes, firm would benefit from additional scale. No, the firm has sufficient scale. Not sure. I'll give a few seconds. You can vote. I won't look. You could vote if you want. I won't look. [Voting]

Wow. So the majority sort of think you need to bulk up, and it sounds like you would disagree with that if I interpreted your...

Well, it depends on how you look at it. I mean I think that there's a very good argument that we're fine. We own -- for instance, we own almost all the golf in the -- if you want golf, we have the PGA, we have the European Tour, we got Tiger, we have Golf Digest. Outside the U.S., we have almost all the golf. We have most of the cycling. In the food area, we have almost all the great chefs that people recognize, and we have the largest recipe library. So if you look at it in passion groups, in home, we're the leader when it comes to Oprah, which has a constituency that goes to look for our science and natural history. We couldn't be much bigger than we are. If you look at it that way, then if their pie is apple pie, and if the golf pie is a cherry pie, we have almost all of it. And so for that, I think we might be fine. But at the same time, every one of those bigger players doesn't have enough content. Every one of them has come to us and said, "You have a huge library in women, huge library with family. Your content library itself is bigger than Netflix as a whole. We need more bulk. We need more great characters and great -- and brands that people want." And so we have had discussions about doing things with others. But in the end, we came to the conclusion that we think we may have enough to go ourselves. And if we're going to go with someone else, they really need to buy us. Because if we gave our content to somebody else to kind of -- if we get -- to fill out one of the other big players, and that we'd be giving away really the future of our company.

Yes, extinguishing the call option.

Right.

Yes. How about -- any questions from the audience? We're happy to take them. Maybe we'll do another poll question. Okay. Will Discovery participate in M&A in 2020? Yes? No? Not sure? [Voting]

Wow. So split 50-50. That's a 45%, yes; 45%, no; 10%, not sure. Let's assume that you don't and you go because you've dropped a lot of hints here about potentially going more aggressive in terms of DTC product. One of the things that I think helped -- I guess, am I interpreting your comments correctly that there's a potential that you guys might do something more aggressive on the DTC side?

Well, we already are in Europe, where we're doing our local language, AVOD, SVOD. We're already doing that, and we've already announced that we're expanding it, and it's scaling. We're already doing our GO product in the U.S., which is growing in a meaningful way. We spent 2 hours yesterday with Amazon, where they're our partner -- the -- on our Food Network Kitchen, where we've developed a great product that we think has real utility, and it's transactional as well in terms of buying groceries and product, and we're aligned with Amazon. We're going to do more kind of really interesting things. So we're already in. What I'm hoping is, if we're spending a couple of hundred million dollars, and we spent a couple of hundred million dollars in 2019, I'd like to spend a lot more in 2020, but we're going to do it on a success basis.

Okay. Do you think there would be any benefit of sort of reporting that separately for the Street? Because I sort of look at what Disney did candidly. And sort of by isolating DTC with international, that sort of allowed the Street to sort of do some of the parts. Maybe the argument is none of this stuff is loss-making. But have you given any thought internally to sort of separating the linear legacy business from a lot of the direct-to-consumer side? It seems to garner a higher multiple on the part of the investment.

We have. And at some point, I think we probably will. They're very co-mingled at this point. We're kind of unique in that we have Eurosport and then we have the Eurosport Player. So we have 3 sports channels in every country. So we have people coming there almost like a funnel. We have eurosport.com, which has 30 million people that come as a funnel, and then we promote all of them to buy our products. So right now, both from the perspective of scale in the way that they're intermingled. But in the long term, we clearly believe that we're not getting value. And we -- and from a shareholder value perspective, we need to get that value. And in order to get real appreciation, we need to. So we'll -- I think the first step will be, at some point in 2020, we'll come to the analyst community, and we'll start to give you some metrics on how big our free funnel is, how big our pay funnel is, what it looks like to us, how different -- how it's doing in the aggregate, what the numbers directionally look like because I think this will be the year that we'll need to do that and then we'll continue to get. And at some point, I think we probably will break it out.

Oh, that's great. What about the Olympics? Can you spend a little bit of time talking about the Olympics? You've got the rights in Europe for '18 -- from '18 through 2024.

Right. Well, the Olympics, those rights really helped us in a number of ways. When we bought Eurosport, one of our objectives was to really build it as a really strong brand. So we reinforced the quality of the IP. We bought more good sports. But having Chairman Buck take the Olympics away from the public broadcasters in Europe and give it to us, it was really a drive together, a vision that we had together, that we were going to reach people on every platform. That in Europe -- unlike the U.S., in Europe, most of the Olympics was just offered on broadcast. So when we did South Korea, we did some on broadcast, then we did individual sports on our Eurosport Player. We gave scores and highlights on eurosport.com, and then we had a product that we sold. And in a week, we had 0.5 million subscribers paying for it. That was 2 years ago. We learned a ton. And one of the things that we learned was, it wasn't enough just to have the Olympics, that we needed -- when people woke up in the morning, they needed to have short-form content as well. They wanted to learn more about all of the athletes. And so we were uploading a couple of hundred pieces of short-form content about the athletes and the sports and the country every day, and that was getting viewed as much as the actual content. And so I think we're much more sophisticated now. Avi and Peter have built a much more compelling platform. The thing that I would call out, though, is that the way that we account for the Olympics, it's a little bit bumpy. So we account for most of the cost when we air it. But the fact that we have the Olympics has helped us. We have high single-digit affiliate growth across all Europe. We've been able to grow our advertising. And there's pieces of that, that relate to the Olympics kind of on an even basis and then it kind of pops itself down when the Olympics itself, when the event airs.

Do you think the 2020 Olympics in Tokyo will be bigger than China in '18? Is there any reason as people are sort of thinking about the size to say it will be bigger or smaller?

I think it's going to be bigger. The summers in Europe, it was very lopsided-type consumption and appetite. In Northern Europe, there was the ski jumping and hockey. In some cases, we were getting a 90 share in Norway or Denmark. And then as you go down to Southern Europe, we were getting like a 12 share. And so a lot of the winter sport is -- depends on the country, and it has very different appeal. Summer is pretty appealing across the board. It's also about twice as much content. If we didn't -- when the Olympics was over, Chairman Buck talked about us achieve -- making promises and achieving all those promises, that we were on every platform, that the feedback was very strong, a lot of young people got involved. And he went out and talked about the fact that he thought that we did is good or better of a job with the Olympics in a more innovative way than anybody. And I think that helped us get -- Jay Monahan looked at that and said, "Wait a minute, they can do the Olympics in 29 languages in Europe over the 19 days without one hitch." And he came to us and said, "You're the only company that can do the PGA in every language everywhere in the world." And then when we're looking at cycling, it's the same thing. So I think it gave us some real credibility as being the company that could execute country by country, sell advertising in every country, get distributors to support a product in every country.

That's interesting. Wow. What about the macro back -- oh, there's a question here in the front. Is that right? Yes? Can we just wait for a microphone? Right in the front table here. Just 2 more seconds.

So I had a question on your unscripted content.

On what? I'm sorry.

The unscripted content, and I fall into the women demographic. And I just think that there's a lot available on YouTube and Instagram, and I was wondering if that is a threat to your business or if that's an opportunity for you to partner with those independent vloggers. I know that you have a partnership with Magnolia, and they have a following like of that sort. So I was just curious if you could touch on that.

Sure. We're a company really of storytellers and characters. That's why we were so aggressive about trying to be in business with Chip and Jo because we think that Chip and Joanna are really unique. There are a number of characters on YouTube and Instagram that are compelling that we would love and have brought on to be part of our company, particularly in HG and Food. Having said that, it's not a pure democratic environment. But when you look at -- when you put a TV set on and you put a clicker in your hand, there's 250 channels you can watch, and there's DVR that you can watch all kinds of shows. And for 7 months of this year, more women chose to watch one of our channels than any other media company in America, including all the broadcasters and all of cable. And so when women can choose anything on a Sunday night, 35% of women in America are watching one of our channels. So I think it says something about the fact that, one, from a curation perspective, people can go to Food Network or HG or ID and know what they're going to get. Just like you can go to Fox News and know what you're going to get. The length of view on those 3 channels are very similar to Fox News, and people tend to put them on, and that's what they -- many have it on all day, and that's what they really love, which is very different than an Instagram or YouTube. And I think that there's a lot of hits on there, but we engage in stories that people can watch for a longer period of time. But we are experimenting now with GO, where if you love -- if you go to Food GO or HG or Discovery, that we're also putting all kinds of short form content. We're taking some of the people that are more successful in the Instagram genre and moving them over on to GO to try and pick up some of that.

It's interesting. Is there a third question from the audience? We'll pull this up. So will Discovery launch a robust direct-to-consumer offer in 2020? And by robust, I mean something above and beyond what you've announced so far and have in the marketplace. [Voting]

Well, so 48% say yes; 41% say no; 11%, not sure. That's interesting. So...

Directionally, if you take away the 2020, directionally, we have to.

Oh, that's interesting.

In the sense that we're -- we may be the best-performing media company on the cable platform. If you put the TV set on, they like our channels, they want to hang out with us. We have a good sense of who we are in each of our brands. But there are loads of people that aren't on that platform. There are loads of people that are broadband-only that grew up loving Food and loving HG, and we could see that with families when they authenticate down to GO, kids, teenagers that are watching all that content on their other devices. And so as great a performing company as we have been in terms of free cash flow and how we're outperforming our peers with advertising, power ratio, in the end, we can't build -- this cannot be a growth business by just staying on the existing platform. Outside the U.S., cable is still growing, 1%, 1.5%. But viewership on television is declining. And so if we want to win in the long term, and we have this great IP that people love that's curated through great brands and characters that people love, we have to take that out. And effectively, there's spillage. And that spillage every year is going to get a little bit more, and we need to -- that spillage is people that know our brands, love our brands, and we need to reach everyone eventually, everyone in the U.S. and everyone outside the U.S. that has any device. We need to be on those devices long term.

So long term, when you eventually go down that path, how do you balance sort of the tension between giving the consumer something that's really compelling on a direct-to-consumer type path versus the tension with your existing distributors that won't want you to sort of be competing with their sort of business? Is that a real concern? Is it the concern? Is it the...

We have the ability to do anything we want. But having said that, we're in some pretty meaningful discussions with our existing distributors because our view is we should figure out how to make them partners. Charter is a great company. They have 10 million, 11 million, 12 million broadband-only subscriber -- customers. Comcast is an extraordinarily well-run company, and they're serving and nourishing their customers. And today, they agreed that they would offer CBS All Access. So they have CBS that they offer, and then they're going to also offer to people that want CBS All Access. That's a very positive step forward. If you -- if all the cable operators, we had our channels on cable with commercials and then we had an ability for all of them to be offering our content to broadband only. Now if you look at Disney, their deal with Hans and Verizon was quite clever. A lot of those subscribers are being driven by a big platform that's using the Disney+, this terrific service to say get Verizon and you get this. And that -- decommoditizing Verizon or they're able to either help their churn or get more subs, that's something that we're looking at with cable guys, that's something that we're looking at with satellite distributors. That's -- those are discussions we're having with mobile players in the U.S. and everywhere in the world. And meeting with Hans yesterday and hearing that Disney+ is really working well for him, that's great news. Because in almost every market in the world, there are 2 or 3 mobile players, and the mobile product itself can compete on price or can compete by having unique content. And you could do it by the way Randall did by buying unique content. And there are those that sometimes do that. BT, maybe they bought too much sports content in the U.K., and it kind of tipped them over. So I think that, that is going to be an area that will really help scale kind of mutually exclusive opportunity. It's very good for Disney. It's very good for Verizon. And I think we can open up our code. We got a great menu. If you're a mobile player in Asia, we have all the golf. You want -- in the U.S., we have great natural history and female content. We could do something with you in Germany. We can -- we have Joyn, and Joyn can be a great opportunity for someone in the market to offer something that's really unique and valuable.

It's going to be an exciting couple of years ahead, I think. Well, thank you very much for the time. This has been fantastic.

Thank you.

Yes, absolutely.