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

As a perfect transition and talking about where you're taking the company here, and you already do have a small, nascent, rapidly growing streaming business. I mean you're on pace to do something like 700 million-plus of revenues. I think that's what you did last year. And as you noted, you revealed plans to roll out this all-inclusive direct-to-consumer streaming product on a global basis. And so the first question I have is as you prepare for that, I know you're going to give us a lot more details at an analyst meeting. But what have you learned in your direct-to-consumer experience so far? And how is that informing what you're looking to broaden as you go to market?

Sure. Look, we've been very methodical about this. We have been at it for many years. We've been at it with sports. We've been at it with entertainment and sports in Europe. We're very optimistic we'll be coming to the market very soon with our plan. We're one of the few companies we own all of our content. We've been aggressively driving additional original content. We think you need a substantial amount of original content. But we have brands, we have great creative. We've been working on our overall approach to the market, but we will come to market with a global attack. And Disney has done it. They're starting to roll out globally. It's quite impressive. And when we look at us, we see the fact that we're different. And the more and more we talk to consumers when we look at the research, there's a lot of great product out there that's scripted series and scripted movies. But we really have something different, and people want more than just more shows. And one of the things that Bob has done, I think, very successfully is when you look at Disney+ from a curation perspective, you see a group of super fans. Whether it's the Disney Kids product, Pixar, Star Wars, Marvel, people look at that and they go, "That's what I love." And it's very easy to curate. And I think that things have really moved in our direction. When you look at us domestically, you look at the brands that we have. People look at Food and Home and Chip and Jo and Oprah. We're the only player that has brands that people love, that are really curation portals. Really, all these super fans, ID, Discovery, we have the BBC library. And we have people, great characters. Outside the U.S., we have entertainment, local entertainment, local content, local sports. So I think we have a very differentiated global approach. But we think you need to have a lot of content, you need to have a clear message of who you are, why you're different, why people will love you and why they'll need you. And one of the additional advantages that we have is that for many people, particularly when they're home, TV is a companion. When I was at NBC, people would put on The Today Show, it was a companion. And a lot of the SVOD services are terrific, but you're saying, "Okay, what should I watch? What's the next series?" And people watch Food and HG and ID and Discovery and Oprah. They're super fans and they watch it as a companion. So not only do we think we can -- we have a differentiated product, but we also -- when you're doing -- if you're homeschooling your kids, or if you're cooking in the kitchen, you might not necessarily watch The Crown, but you might want to watch Guy Fieri and Bobby Flay in the background and see the characters and the people you love. And those characters and people and the brands also, I think, will really benefit us as we look to differentiate and promote our product. So you'll hear from us soon. I think one of the keys is getting partners to help. So we've been very quietly over the last year, working aggressively in getting all of our stuff together. And we're quite close. And the additional thing that's happened is, I think, people have gotten very acclimated to this idea of subscribing. I think we're at the very beginning of that cycle. And they've subscribed to a lot of stuff. And for us, we're going to be coming with a fresh library of content, a huge amount of fresh originals at a time when people are -- the road has been paved by Netflix and Disney and HBO. And people are getting more and more acclimated to viewing content on devices. And if you look, when people have a choice on traditional TV, they're choosing us as much or more than anybody else. More women are choosing us when they could watch anything. And our only challenge right now is we're not on every device. We will be very soon, and we will be in a way that's aggressive.

Right. Well, is it fair to say that the partnerships are the last pieces you're looking to have in place before you're prepared to provide more details on the product?

We just want -- when we come to market, which will be very soon, we just want to check all the boxes. We have been in business direct-to-consumer for a long time. We've been talking to consumers. We want to get the best sense of not only what do they want, but how do we create the best overall package with the best brand, with the best global brand as well as enough original content that excites people domestically and around the world. Outside the U.S., we think we have a very -- a real advantage in that there's great products, but most of them are U.S. products with a little bit of local. And the investment that we made across Europe and Latin America with local content, we think, is really going to create an advantage. Because again, it's a differentiation. There's a lot of scripted in movies, but we have local entertainment, local sports and local affinity content. And so overall, we think -- look, I think this is probably the most important thing we'll do as a company since I've been at Discovery. And we've been getting ready for it for years. It's one of the reasons why we got into local sports. It's the reason that we did Scripps, because we own all that content globally. And we think this idea of differentiated content, brands that people love, characters that people love, aggregating together, when you talk about a bundle, if you think about all of our content together with Netflix, all of our content together with Disney, all of our content together with Showtime or HBO, all of our content together if you have all of them, because we're different than all of them. And so we really feel that we have a moment, and it's critically important that we reach everybody everywhere in the world. And that's where the industry is going. The good news for us is we have trailing free cash flow of over $3 billion. We're outperforming our peers. On the advertising side, not only is our share growing, but the fact that in the U.S. we've been able to really drive value with advertisers in the upfront and in scatter, I think we're going to see meaningful free cash flow and a stabilized U.S. and international media business. It's putting off, for us at least, massive free cash flow. That free cash flow machine that we have will be funding the next level of growth. And I think we're one of the few media companies, we haven't been selling our content. So when we make this churn, our content is not coming off dozens of players, and we're not going to be waiting for a long time for most of our content to come back. We could be making a lot more money if we were selling our content. This is the moment now where we can take all of it to market globally.

I was going to ask you next about this. So you pointed out the free cash flow generation of the company. And that actually includes money you're already spending to position the company for this next step. So you're going to already invest about $600 million this year through your adjusted EBITDA, and you're still going to get to that free cash flow number. So the question we get is, is that run rate? I mean how much more do you think you need to invest in order to be positioned for a strong global launch? And then also, what is your ability to repurpose what is already a pretty significant investment in the content, so you're not necessarily spending a ton more for your stream product, you're just spending it a little more efficiently across your different distribution models?

Look, we own all of our content. One of the things that's been helpful in this COVID experiment is as we've produced over 1,000 hours of content, the cost of that content has been dramatically lower. People are -- Joanna Gaines is -- we're producing that content with Chip shooting it with a GoPro or with an iPhone. And it actually is of the moment in current. And so our cost of content in general has gone down, and we've learned a lot from that. But even if our cost of content remains where it's been, it's dramatically lower than scripted and movie content. And so our ability to produce, and we've been producing a lot of content, original content to get ready for this moment, we -- the -- our ability to do that and the cost of that is dramatically lower. And so I think that's a big advantage for us, as well as the cycle of time that it takes to produce the content is much lower. It's one of the reasons why when you look at all the fresh content we have and the ability to continue to have fresh content is that our cycle is low. Particularly on channels like Food and Cooking and DIY and some of the content we're doing on Discovery, where we could just shoot Mike Rowe following Deadliest Catch and we could run it within the next few days. And so I think we have an economic advantage that's meaningful as well as our differentiation.

I was just going to follow up on that because obviously you have had a production advantage during the shutdown. As you noted, you've had different ways you've been able to continue to produce your content. But where are you in terms of maybe getting back to something that's a little bit more normal in more of a post-lockdown kind of production cycle?

Well, we've -- we're back in business in I would say 2/3 of our content. We're back out producing but a little bit more carefully. And that, we're likely to be fully back in the next few months. But we don't really feel it because in the areas that we haven't been able to produce, we're producing in other areas more aggressively where we've been able to produce before. So I think we uniquely will continue to have original content domestically and around the world. The area that we do feel it is sport where we, like everyone else, were down for a long time with Eurosport and on our free-to-air channels in Europe. Sports has come back now in Europe. It's been pretty stable or good. But overall, I think our ability to continue to produce content, to have our channels feel fresh will be an advantage for us versus a lot of our competitors.

So I was going to ask you about sports next. How do you think about your international sports contracts going forward? And is that an area where you think you should be investing more? Are you comfortable with the amount you've already invested?

We think that this idea of local content, local sport is quite clever. And before, we were really keeping them separate. But we've started to experiment with this idea of, as Netflix and as other players come over the top with pretty compelling products, what do we have that's differentiated? With Joyn in Germany, we've seen a lot of success. In a lot of the markets, we have 20%, 30%, 40% share of entertainment and sport. And so I think sports is a very important differentiator for us. And the idea of bundling local sport with local content, together with our affinity brands, really makes us unique. If you look around the world, there are a lot of people that want to play on an international basis, but they don't own the content or they need to figure out how to get local content. And so the fact that we have a local library in every market, in, every language, and in Europe we have local sport, I think really differentiates us. And it's one of the things as you look at the kind of value that we've been able to create, think about sports was gone, and we did -- we performed really well without it. And now that sports is back, it's been advantageous to us. The thing that we have learned is we don't really need football in most markets. So we own the cycling, we own the tennis, we own the local handball. Under -- having teams on the ground in all the markets across Europe and understanding what are the local sports that people want, we're able to get those for good economics. And that really drives our audience, and it drives our differentiation.

Before we move on here, a question that I get a lot, and you've referenced the fact that you have these personalities that are affiliated with your channels and your brands that people really love. That's why they keep coming back to watch your content. As you look to take those relationships in that content and pivot it into a streaming world, there's a lot of other big streaming platforms who see those same personalities. They're going to go to them and say, "Hey, you don't have to be with them. You can be with us." What do you think is unique about Discovery as a place for those talented individuals and those influencers to create their work so they're going to stay with you as you make this transition?

Well, one, I think you're right, but over the last couple of years, we haven't lost anybody to any of those streaming platforms. And I think part of that goes to the fact that we're a global company and we have an ability to really have people be seen everywhere in the world in every language. And so when Guy Fieri as -- Scripps was an extraordinary company, but a year later, Guy Fieri goes to any country in the world and people say, "There he is Diners and Dives." And so we have an ability to generate massive audiences globally. We also produce very well within these niches. It's quite difficult. A lot of people have tried to play in a lot, whether it's science or adventure or food or home. We have specialists in all of these and in each of these brand categories. And we have an ability when we have a strong character with a lot of talent, to put them together with the best production companies. And then put that content, not only do we put it on the air, but if you look at a lot of our channels, TLC right now is the #1 channel for women in America. 90 Day Fiancé on Sunday night is getting over a 4 rating. And 90 Day is a franchise that are on Sunday and Monday, we -- it's the #1 show on television. And so our ability to -- for us, that's like our NFL. The ability as our networks have done better, the ability to launch more successful shows and to take all the characters that work for us and kind of supercharge them. And finally, like what we did with Oprah where, if we want to, not only did we put Oprah on everywhere in the world, but we put it across all of our networks, and we were able to reach a massive audience globally. And so I think that the market will continue to be competitive. But we're not in the scripted series, scripted movie business. We're in the business of great characters, great brands and niches. And in what we do, I think we have a leadership team that's really strong, and it's really global. And I think that, that is a huge advantage for us.

These points of transition in industries are typically associated with periods of consolidation. You noted you already made a very significant strategic acquisition in Scripps. As you look at the media landscape right now, do you see more opportunities for Discovery to participate in M&A to strengthen your transition into a global streaming company?

No, we've spent the last 6 years aggregating IP. We view ourselves as a global IP company. What IP do we need? That's why we did the BBC deal where we own the next 10-plus years, Planet Earth, Frozen Planet, Blue Planet. That's why we did Motor Trend. That's why we did Scripps. We see ourselves as a global IP company. And we think we've got quite a good hand right now. We have local content in every market. We have local content and local sports in Europe, where we're a dominant force. We beat Disney in Latin America with kids as well as having a lot of female and male channels. And so -- and in the U.S. right now, we're #1 for women as well as having a very strong hand for men with quality brands that are easy to curate. And so we look at our overall IP today as well as our library as big or bigger than Netflix. And I think this is our moment right now to see we -- I like our hand. And I think ultimately consumers will -- they'll aggregate by saying, "I love Disney+, but Disney+ together with all this stuff from Discovery, that makes a hell of a bundle. Or HBO and this makes a hell of a bundle. Or Netflix and Disney and this make a hell a bundle." And so we think we have really unique scale and unique IP. And we'll see, the good thing about going direct-to-consumer, and we've been doing it for a long time is they tell you. When we're carrying sport in Europe, they'll tell us exactly what more they want from us from the Olympics or what else they want to see in tennis or cycling. Or they want more of this or less of that. And so it is a much more of a -- you get much more feedback. And I think at least for us, we built our tech stack. We have a very good team of over 200 engineers that have gotten our tech stack ready. We -- as you say, we've been going direct-to-consumer in the U.S. with our GO platform, which has been quite successful. We'll be getting a lot of feedback. And so listening and looking at what people are consuming, what they want more of, I think right now our hand is pretty good.

All right. Well, I've got time to squeeze in one last question. What should investors be focusing on over the next couple of quarters to see that the company is delivering on its commitments?

I think one is take a look at how we're doing with our distributors everywhere in the world. What does that -- what do those economics look like. What does our carriage look like around the world. How are we performing with advertisers versus our competitors. And how are we able to grow our advertising in a meaningful way. And when we take our bundle of IP that we've spent the last several years carefully buying and putting together and producing, do we have content that people love? Do we have brands that people love? Do we have characters that people love? Do we have sports that people love? And if we do, I think the road is paved for people to be able to easily get it. And that's what we're betting on, and we'll be back soon with how we're going to do it and who's going to help us.

All right. Well, we'll be looking forward to that. David, thanks so much for being here with us virtually, and we hope to see you in person next year.

Okay. Thanks, Brett.