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

Okay. Good morning, everyone. I want to just welcome everyone for joining us for our Virtual Media, Internet and Telecom Conference this year. We hope to have it back to a live conference next year, but we're doing a virtual one more time. So our first speaker of the day, I'm really pleased to announce, is Gunnar Wiedenfels. He's the CFO of Discovery Communications. Gunnar, I'd like to welcome you. Thanks for joining us this morning.

Thank you. Thanks for [ having me ].

Why don't we start off, Gunnar, on your earnings call, you talked about investing more into discovery+ this year than you originally planned. What have you been seeing in the business that led to this decision? Can you give us some additional color on where you're investing? And what kind of results you expect from the increased investment?

Sure. Well, listen, Bryan, this, as you can imagine, was a super-important project for the entire company. Everybody worked so hard, and we're just so excited that discovery+ has really come out of the gates very, very strong, so right from the start. And again, it's early days, but everything we've seen so far has just been super encouraging. We're -- if you start from the top down, our roll to pay was better than expected. The engagement metrics are looking very strong. And as we said 2 weeks ago, we're already sort of beyond what we've seen in the linear world in terms of viewing time and engagement of our subscriber base. Also regarding the discovery, no pun intended, of the breadth of our portfolio, we've been really intrigued. Our viewers have already discovered 93% and watched 93% of that vast sort of array of 55,000 episodes that we have on the platform. So that's all super encouraging. The monetization side has come along very well. Again, it's very early days, but we see great interest from advertisers already, more than 100 brands in the platform and expecting that to double within a couple of months. And remember, when we spoke in December, we put out some short-term targets around sort of our ability to monetize these products, or that product. And we're already hitting those midterm target numbers. The 3x multiple in pricing that we thought was possible is materializing. We're already ahead of the linear equivalent ARPU for our discovery+ subscribers, specifically here in the U.S., that's sort of what I'm focusing on right now. Internationally, we're a little -- the rollout is going to take a little longer as we work through country-by-country, the launch time lines, distribution deals, et cetera. But as we said in December as well, the opportunity is also very, very significant in the international market. So top to bottom, there really was not one metric that was disappointing. And from the investment decision perspective, what we're looking at is our expected estimated customer lifetime value relative to the subscriber acquisition costs that we're paying on a per subscriber basis. And that as well has come in and it turned out to be very, very efficient. So there's a big cushion between what we expect the customer lifetime value to be and what we're paying, and that's why we made the decision to really lean in hard because it's actually a straightforward investment opportunity, and it's by far the best opportunity we have at our hands right now.

And you also reiterated your guidance for peak direct-to-consumer losses in 2021. If increasing investment levels this year is NPV-positive, is there a possibility that you come to a similar decision during your 2022 planning cycle to increase that investment?

Look, maybe, but I have a lot of confidence that we will see the peak of our investments in 2021. Because when I talk about investments, I'm really talking about start-up losses. Right now, it's sort of the costs that we dedicate to this product, but the losses that we're incurring. And if you look at a little bit of guidance that we gave when we gave earnings 2 weeks ago, the one thing that's already coming through is some real traction on the revenue side. U.S. distribution revenues is going to be double digits in the first quarter. And that is obviously a combination of healthy underlying trends on the traditional linear side, but there's a very significant contribution already visible that's coming from our discovery+ subscriptions. Roll that forward, because it's obviously in ramp-up through the quarter, we should be able to expect more tailwind in the second quarter, et cetera, et cetera. So in other words, the high ARPU potential that we have, that additional revenue growth is going to allow us to do 1 of 2 things: Either drop -- start dropping some more of that revenue to the bottom line, which would reduce our losses; or keep investing more at the same sort of start-up loss level. So that's why I do think that there's a lot of cushion for us to really be certain that this is the peak investment year. But again, I mean, we'll see how it turns out. We will definitely make the right decision for the long-term sustainable growth of this company here. But it's looking pretty good.

And has what you've learned so far since launching discovery+ changed your guidance for 20% margins at scale, especially considering how much more profitable Discovery has been historically relative to other cable network groups? Should that advantage carry over into streaming, especially given some of the positive comments you just made about how well it's going?

Well, it's funny you bring that up because we did get a lot of questions on that 20% margin commentary. And I -- Netflix, I think, last I checked, is around 20% right now. I think -- listen, I gave that number because I was very convinced that we can at least hit the number. So there is a little bit of conservatism in there. At the same time, we're talking about a couple of years out. Many things might change. But you're right, if we just take a step back, what do we think when we came up with that guidance? What have we seen since? Monetization is looking very good. Are we just ahead of the curve? Or is there sort of more longer-term potential? Remains to be seen. Again, I think what matters here is that there's a lot of unknowns, but I think we will do better than others in many categories. We've got better content efficiency, not only because of the content verticals we're operating income, but also because of the global synergy across 200 territories and across platforms. So we're already seeing some of that ping pong between discovery+ and the traditional linear platform that we can talk more about. But we've got the marketing efficiencies, using our own air to very, very efficiently generate top-of-funnel demand, which then helps us be more efficient on the performance marketing further down the funnel, et cetera, et cetera. So I continue to think that we'll do well. This is an attractive-margin business. Is it 20%? Is it 30%? We'll see. But I feel very good about it. And I do think that, as I said in December, we will definitely break even earlier than peers. Again, not saying that, that is an objective in and of itself. But I think our economics are better, and we'll probably have a better margin profile in the long run as well.

And just to follow up on one of the things you just said. You said it's a couple of years out. And some people will hear that comment and take it pretty literally. So I just wanted to maybe just give you a chance to clarify. Is it really a couple of years out? Or is it -- could it be several years out? Any more color there?

Again, we specifically haven't given guidance and made a deliberate decision, and it is too early to do that. But again, I think others have given guidance, and you should assume that our ambition is do better. But again, I also want to make sure people understand that we're not managing this business to a margin profile or to a breakeven or so. As long as we have these amazing investment opportunities by investing more to drive more subscribers onto the platform and then sort of build that long-term growth profile, we will do so.

Okay. You launched discovery+ in the U.S., the U.K., and you converted some Dplay markets in Europe to discovery+. Can you walk us through the broader plan to launch the service internationally, both in terms of timing and relationships with distribution partners?

Yes. So I think the -- as we said earlier, the difference here is, right now, we're very focused on the U.S. rollout. That's been the priority. Internationally, the team is hard at work to work through the platform adjustments for each of the individual markets. There's a little bit of tech work that needs to be completed for sort of each local market. And we're also working through additional distribution deals. We've announced some deals, as you know, Sky, Vodafone, Telecom Italia and most recently Saudi telecom. So there's more in the pipeline, but it's also safe to say that these deals are going to come online over a longer period of time. Vodafone is going to start, gradually kicking in, in the second quarter, but then sort of essentially rolling out over almost a 12-month period. So that's happening. Everything we've seen so far in subscriber growth is almost exclusively markets where we already had a Dplay product which we converted, with the exception of India, which as we said, is not a huge contributor here to our rollout. But -- so there's more coming, but it's a little more back-end, second half loaded here than on the U.S. side. Especially because, as you would imagine, the Olympics are a major platform for us to really supercharge the rollout with the Tokyo Olympics and then Beijing.

Is it fair to assume you launch throughout Europe by the summer ahead of the Olympics? What kind of uplift do you expect from the games?

Well, we'll see. I mean, we're super excited about the opportunity of the Olympic Games. If we go back in 2018, it was very interesting to see how people were coming in and how they were sampling. And obviously, there's always some subscribers that leave afterwards. But we were very happy with the outcome. And we got very, very positive reviews, both publicly on the press side and from the consumers themselves. We've continued to work hard to improve our technology footprint. And so we're really excited. And definitely, the Olympics should be one of the key drivers for the international rollout this year. But we'll see the order of magnitude, but we're very excited about it.

Okay. And how should we think about the impact of your direct-to-consumer strategy on your international networks' affiliate revenue going forward? Do you think carriage drops by existing distributors will become more commonplace?

I don't. I don't. The pattern that we've seen over the past 18 months or so as we've been at this in some markets with Dplay already and with the Eurosport Player, et cetera, is that we should be able to find common ground and sort of win-win partnerships. As a matter of fact, we have closed a number of deals where the overall deal value was such that we were very happy with it, our partners were very happy with it. But in fairness, there is some sort of reallocation of values between the different products, which is fine because we can both grow and both sort of drive our businesses. And we have to acknowledge the fact that the landscape is changing. So I have all the confidence in our ability to continue to drive those kind of deals. But clearly, there is one that is a big new variable that's in the mix now, so all of these discussions are one notch more complex than the they used to be. But as we've said so many times, in the affiliate space, none of these deals have ever been sort of super straightforward renewals, right? But I feel very good about it. And our partners are excited. The ones we've partnered with for the discovery+ rollout so far are very, very happy with the product.

In the U.S., what do you expect the mix of subscribers to be like at scale -- sorry. What do you expect the mix of subs to be like at scale from a U.S. versus rest of world perspective?

Look, again, too early to have an intelligent answer to that. We spoke about the market potential, the 70 million addressable homes in the U.S. and then 400 million internationally, where we feel very, very good about the opportunity in both the domestic and the international market. As we laid out, the thing that could be really, really interesting for us on the international side is just the fact that we're opening ourselves up in 2 dimensions. Number one, all of a sudden, we're not talking about 700 million pay-TV homes, but we're talking about billions of mobile and connected device users. Number one. And remember, in some of the international markets, pay-TV penetration is just a lot lower than what people are used to here in the domestic market. So this is a material expansion of the total addressable markets for our product. Number two is the pricing side. Again, whereas in the U.S., one of the concerns that some people, some investors had that I spoke to over the past couple of years is, are you ever going to be able to get these great revenue per user metrics that you're achieving in the domestic linear market? How are you going to transfer that to the D2C space? And fact of the matter is already, we're ahead. We're already making more money on our direct-to-consumer subs here 2 months out of the gate. And we have significant growth potential with, I think, pricing potential, both for subscription; but also on the advertising side, there's more products coming down the pike that are going to really help us to optimize that add ARPU. So that's the U.S. side. Internationally, it's, again, a multiple of that because our linear ARPU in many of the markets where we have much smaller share, et cetera, is significantly lower than here in the U.S., whereas the SVOD price points are pretty much in a comparable range. So we're already seeing that we're -- in those markets where we have rolled out, that we're getting a multiple of the linear ARPU in the direct-to-consumer space. Now again, it's not a walk in the park. There's other challenges. All of a sudden, we're acquiring every subscriber directly. We need to retain them. We need to excite them every single day of the year. We need to build out customer care capabilities, et cetera, et cetera. So it's not a walk in the park, but the price is just so much larger, much bigger addressable market, much higher ARPU potential.

Right. Okay. And we'll come back to ARPU. But I wanted to ask you about the Verizon contribution to subscribers so far. Is that relationship driving as many net adds as you expected?

We're very happy with the Verizon partnership. I mean, it sort of was a big objective for us to get that partnership because it's just been proven to work so well. And we're happy with how it's going for us. I think they're happy as well, I think I can say that. And so that's a great -- it was a great helper here for us to get out of the gate. And beyond Verizon, as we said before, there's obviously other parts of the ecosystem, traditional cable operators, connected device manufacturers and operators. So we're continuing to work on additional partnerships. We're actually pretty close to finalizing 2 key deals. And so stay tuned that there's going to be more. Partnerships are super important to get us to scale quickly.

Okay. And the mix of subs has skewed so far toward the ad-free tier. I suppose that's partially a function of that Verizon relationship only offering the ad-free version. But over time, what are your expectations for the AdLite product mix versus the ad-free?

Look, I think the ideal place to be would be that -- I mean, we're pretty much indifferent, right? I mean, there's a little higher ARPU on the AdLite side than on the ad-free side. Over time, we'll see how those price points settle. I mean, others in the space have shown an ability to raise prices over time. Again, I think what's important here for us is that we cater to both kinds of subscribers, those who want the ad-free experience and those that want to pay a little less. And financially, it really works out for us either way. And therefore, I don't really want to speculate on where this is going to settle. Over time, we'll constantly look at what opportunities we have to optimize value here. But most importantly, we want to make this product available and attractive for as many people as we possibly can.

Okay. Can you talk about trial conversion and what that's been like so far? Are most converting after the 7-day period? And what are you seeing there?

Again, I don't want to give sort of any specific stats here. But I think what I can say is that we were very, very happy with the conversion metrics that we've seen ahead of the rest of our portfolio right out of the gate, and it continues to hold up very nicely.

Okay. Do you think you'll have pricing power in discovery+ over the medium to long term? Or do you think it's priced right for a while at $5 and $7? How did you settle on these current price points?

Well, I mean, look, I think it's too early to talk about pricing power here. I think, as I said a minute ago, many of our peers in that space have shown the ability to work on prices over time. Right now, this is the right price points for us. And in terms of finding those price points, obviously, there was months and months of analysis and discussion, et cetera. But at the end of the day, as David said when we first announced this product, we are in a situation where we have a linear-traditional ecosystem with its own sort of contractual relationships and pricing restrictions. And we have definitely made sure that we stay away from any interference there. That's kind of determining the lower end. And on the upper end of the price range. Again, there are competitive offers in the market that have informed our decision. And the other thing is we are in the great position that didn't have to tweak the price point to the absolutes of maximum that's possible. Maybe we could adjust that at a later stage. But given the efficiency of our content and given that, for us, the bar in the traditional linear world isn't as high as for many others, we're very, very happy with where we were able to price these products. Again, we're not -- we're comparing to a couple of dollars CPS in the traditional world, unlike some of the peers who might have a higher bar there.

Right. Maybe switch to advertising for a minute. You mentioned on the earnings call that you've got 100 advertisers today, and you expect that to double by the end of the second quarter. Are these mostly existing Discovery advertisers that are trying to increase reach? Or are there many new advertisers to Discovery as well? If you could talk about what you're seeing there, that would be great.

Sure. So it's a mix. We did start pushing the product a little in last year's upfront. So we had -- we were going into launch with some commitments. And it's both existing and new advertisers. And again, so far, the feedback has very positive. And as we said, we expect to very quickly ramp up that number of brands on the platform. And again, the beauty here is that we'll be able to offer a very, very rich, not only experience for the consumer, but also product for our advertising clients. There is so much additional functionality coming down the pike. As early as the second quarter, this upcoming second quarter, we'll have pause ads, binge ads and a lot of other functionalities that are slated to be released. And it's just opening up so much more opportunity for our advertising clients, let alone the benefit that we're getting and that we're passing on to our advertisers, from the fact that we are building out an increasingly valuable pool of first-party data. We already have a pretty compelling data product in place with our OneGraph functionality whereby we're combining several sort of first- and third-party data sources to improve our targeting capabilities. Clearly, with every additional subscriber on the direct-to-consumer side, we're going to increase our match rates and make that product more valuable for our advertisers. So really, really excited about that, and it's certainly going to play very well in the current upfront season.

Okay. And maybe switch to content for a minute. What's the plan from a content perspective? Can you remind us of the original programming you launched with; the breadth of your library; and the plan for new, original content going forward?

Yes. So I think the most powerful thing about this product, as we have learned now also from a consumer perspective, is the fact that we have a library of 55,000 episodes on platform. But we've also come out of the gate with 50 original shows, 150 hours, and we're planning to release 1,000 original hours over the course of that first year. So we have put very significant investments behind this. Again, the other thing, as we already laid out earlier, is that we're -- we've really sort of done a lot of experimentation over the past few weeks since the launch of the platform with all kinds of -- I mean between our existing GO TV Everywhere offering, the linear world and discovery+, we've tried all kinds of constellations, and we're learning a lot. We're also putting a lot of our own air behind the product. But also on the content side, there's different windowing models that we've looked at, et cetera. And I think that's going to be one of our big advantages in the long run, that we have this very, very successful, powerful linear business. And that's helped fuel that amazing library for discovery+. But equally in the other direction, those 1,000 hours of original programming on discovery+, at some point, some of that or a lot of it might find a second life on the linear platform again. So hopefully, there's going to be a little bit of a flywheel effect with the 2 ecosystems sort of cross-pollinating.

Okay. And I guess another question on content. With most major streaming services, original programming tends to drive acquisition, while library drives engagement and retention, one could make the case that the nature of your brands and your content is different, though, than say, Netflix or Disney+. Based on your research and the experience to date having discovery+ in market, what have you learned with respect to the role of your library versus original content on discovery+?

Well, I think it's -- you're right, and I think it's a general theme that original content plays a more important role for subscriber acquisition. And I would expect that to be the case here for us as well, and it's also in line with some of the early data that we've seen. I will say, though, that I think we were all a little surprised by how much work our library does with discovery+. There's usually a very sort of steep slant in terms of percentage of viewership that's driven by your top, top shows. Our 4 top shows have driven less than 10% of viewership, and 93% of all episodes have at least been watched once in those first 8 weeks or so. So with that being said, we will definitely continue to get behind the original programming. And remember, we're also continuing to make very, very significant investments in the linear world as well. It's just worth pointing out that this year is going to be the year of the highest aggregated, consolidated content spend in Discovery's history. Clearly driven by originals for discovery+, but we're also continuing to make very, very significant investments in the linear ecosystem. Because what we learned last year was, as everyone else was pulling back, partly had to pull back because production cycles got disrupted due to COVID, et cetera. But when we actually leaned in and came to the viewers with a lot of shot-at-home, like fresh content at the peak of the pandemic, we saw very, very good success. And I think that differentiates us right now from any of our peers, that we're not in repeats, we're full on in investment mode, and that's paid off.

Yes. The 93% statistic is pretty remarkable, really, especially given such a short time in the market. Are certain Discovery brands or content genres outperforming others within discovery+? Or are you seeing pretty even consumption -- even distribution of consumption?

Well, the interesting thing is that it's very well balanced. And all of our top 6 brands are almost contributing, maybe not equally, but in a very balanced way. We did get a little bit of a Paranormal spike in the early days, which was interesting. But the fact of the matter is all of our top brands are very well represented, which I think is great. It's -- it just sort of speaks to the breadth of the offering that we have in the market.

Yes. And going back to subscriber acquisition for a moment. How do you think about utilizing your owned assets as a funnel to drive subscribers to discovery+? For example, has Discovery GO played a role as a funnel for discovery+ gross adds?

It has, and so have our linear network. So what we have done in the first quarter here, you may have noticed that we have leaned into marketing fairly significantly. And that's both sort of paid external marketing, but it's also our own air. And so we have repurposed a lot of our own promotion inventory and some of our advertising inventory to really sort of promote discovery+. Remember that we had to start by really driving awareness of the product because, again, not everyone really understands the full value and breadth of this content offering. So we worked hard to position the brand, position or create an understanding of what this is, promote individual shows versus sort of the value of the product versus the brand, et cetera. So we've done a lot of work on that. And I think that the fact that we had access to this, the vast amount of promo inventory on our own air, that, that's helped drive the efficiency of our subscriber acquisition because we were able, in a very sort of nonmonetary way, to drive sort of top-of-funnel awareness, which then sort of further down the funnel creates opportunity to pick up subscribers in our performance marketing campaigns. And GO is an interesting factor as well because you could have a positive and a negative view on sort of the value of GO for discovery+, right? Because we could say, well, maybe the fact that people can authenticate and get some of the content essentially for free might be a problem to drive discovery+. Or you could argue, well, we've got people who are using the GO platform who are obviously fans or interested in the brands, and maybe that's a promo opportunity to convince some of those folks to actually take the next step and sign up for discovery+ and get more of that content, potentially in an ad-free fashion, et cetera. It looks like the latter is the case, and GO has turned out to be a healthy contributor to our acquisitions. That's one. And Bryan, the combination of having access to this marketing machinery across 200 territories globally makes our marketing so much more effective. And having access to that same machinery to exploit our content synergies, one way or the other, makes our content spend so much more efficient. So I mean, it's a pretty unique global, very efficient setup.

Okay. Interesting. When you began your direct-to-consumer strategy at Discovery, it was with more focused services like Eurosport, Golf, Food Network and The Kitchen, the latter 2 being in that kind of you and do category that you've talked about. How do these services fit into the strategy today? How are they performing? And do you see them as a permanent part of the strategy going forward now that you have discovery+?

They are performing. I think strategically, it's safe to say that we have shifted the focus to a more aggregated product, which is going to inform our views on each of these passion verticals as we move forward as well. So we're looking at it. It's -- we haven't made all decisions yet. The one decision we have already made is that Eurosport is going to be an essentially an integrated product. The Eurosport Player is going to be an integrated product with discovery+ in most European territories where we have a discovery+ presence. And it's going to be essentially a bit of a locomotive for that bundle. And we're looking into bundling opportunities for some of our other products as well. We do think that, again, we have so much to offer. And each of these sort of specific verticals, there are very, very passionate fans and there may be opportunities to bundle sort of the big aggregated product with subscriptions for some of the passion-driven product. And remember, some of those are really also sort of still in the early innings of their rollout. So it's something that we'll continuously evaluate. And clearly, discovery+ is the big umbrella now, and we'll make decisions on sort of the future of each of the individual verticals along the way.

Okay. That was a great discussion around your direct-to-consumer business and where that's going. Why don't we switch back to the traditional business a little bit and talk about the trends there? Your U.S. network advertising trends sound pretty strong in the first quarter based on your earnings call comments, that scatter was up mid-teens over upfront. Has that strength continued? How do you expect the shape of the ad recovery to end up for the rest of the year?

Yes. Look, I mean, the first quarter market is strong. Maybe not completely with the level of the fourth quarter, but it's doing well. Some verticals are still not so fully fired up again. Again, as I said earlier, we have, here and there, made some decisions to sort of deliberately take ad inventory to promote our own air. So that's something to keep in mind. But for the rest of the year, again, I'm not in a position to give clear guidance. But just conceptually, you would hope that, with a lower bar starting in the second quarter, number one, prior year comps just get easier, a lot easier. And secondly, I do want to be optimistic when it comes to vaccinations. Feels like there's a lot of vaccines coming down now and, crossing fingers, that hopefully we'll see a better sort of at least second half of the year. But again, it's -- I'm probably not the person you should ask about sort of those macro [ level ].

And you've talked about the upside to linear CPMs following the Scripps Networks acquisition, part of which I think you've successfully captured already. Should we expect another step up in CPMs following the upfronts this year?

Well look, we have, for several years now, consistently worked on our pricing. And it's no secret, we will continue to work on pricing. We are underpriced in the market. There is -- by any standard. We're delivering more than broadcast on many nights of the week and we're trading at a very significant discount in our ad rates. And we have rectified some of it. But again, with more data coming into the equation here; with a bigger share of digital advertising; with our premier product whereby advertisers now able to buy really top, top-performing spot, slots, if you wish, there are very, very good reasons for us to keep pushing on pricing. And frankly, for advertisers to really get a great deal, to get better value for 30% less CPM. So I have no doubt that we'll keep pushing. And I think that's in the best interest here for the company. And we're delivering a great product for advertising as well.

And on the subscriber side, you reported a 3% U.S. core subscriber decline in 4Q, pretty solid outcome compared to the rest of the markets, roughly 5% decrease. What's allowed you to outperform most of the other network groups? What are your expectations for subscriber declines going forward?

Well, answer to your first question is, I think, a little bit of deal mix. We have picked up some distribution and individual renewals. The second factor is virtual MVPDs who have continued to do very well for us. To your second question, I'm not going to make any predictions here. I think it's too early to talk about a trend change here. I think it's more likely to normalize again. But so far, so good. I think we can live with this trajectory here. And we're certainly very happy about the outperformance that we've enjoyed for the past couple of quarters, and we'll see how this progresses going forward.

And obviously, distribution renewals impact your affiliate revenue trajectory and growth rate. Can you give us any color at all on what that domestic distribution renewal outlook looks like over the next year or 2, even in broad terms?

Well yes, pretty much in line, what we have said previously. Obviously, with the completion of the Scripps acquisition, we have a couple more renewals every year than we used to because not all of the deals have been coterminous or we've had an opportunity to make coterminous. So there's more renewal events ongoing per any given time frame. The -- as we said before, we feel good about our position. We feel very good about the value of our product for our affiliates, especially if you factor in the local avails, that they're making back a lot of the money that they're paying us. And in the end, that leaves a very, very small amount of programming expense for them in return for 20% of cable viewership. So from a value position, I think very, very compelling proposition. We're working with affiliates to discuss sort of the impact of discovery+. Hoping that we'll be able to turn that into a win-win partnership as well. And as I said, we're pretty close to final on one important deal here, which is going to be a big helper. And stay tuned on that front. Yes, but so far, so good, yes.

Okay. And on your earnings call, David mentioned that Discovery will generate sustainable, long-term growth based on your reinvestment into direct-to-consumer. Can we take that statement literally? Should we expect revenue, EBITDA and free cash flow growth each year following 2021?

Well, so the background of that statement is you could ask, what are we optimizing for here, right? And there's no doubt that we are starting from an extremely attractive business, extremely high margin, but with a challenged top line. The way we look at what we're doing here is really to make sure that we return to profitable top line growth and sustained top line growth. And what we mean is, whether we drive a lot more growth in the direct-to-consumer side and then so we can digest a little more decline on the linear side or it's balancing, that transition takes a little longer, we're almost indifferent. The priority right now is to really fire up the second pillar here to have a real growth engine on the direct-to-consumer side. And that's looking very good. And the ARPUs are such that they can replace losses on the linear side if need be. Obviously, we're hoping to be able to fly the plane with both engines sort of at full power for as long as possible, but that's really what we're optimizing for. The bottom line then, again, obviously, will be defined by some start-up -- loss of start-up investments initially as we build out that platform. But as I said earlier, as the platform scales, given the efficiency of our financial model, I'm very, very encouraged as well.

Okay. And before I ask you about capital allocation, I just want to make an announcement. We probably will have a couple of minutes for audience questions. So if anyone wants to submit a question, you can submit it through the interface. So Gunnar, regarding capital allocation, you've paused the buyback this year to reinvest into direct-to-consumer. What are your plans for utilizing the free cash flow that you will generate this year?

Well, let's see. The most important point here is that -- and that's actually been a consistent statement for the past 4 years or so. We have clear priorities. Number one is investing in the organic and potentially inorganic growth of the company with focus on organic right now because we've got this opportunity with significantly higher customer lifetime value than subscriber acquisition costs. That's something we didn't have 2 years ago, at least not at scale. And so that's the number one capital allocation opportunity here. Number two is on the inorganic side. You saw us make some smaller acquisitions last year, Tele 5 in Germany, MediaWorks in New Zealand, et cetera. We'll continue looking for opportunities like that just because the ability to extract very significant value from those smaller tuck-ins, acquisitions, is just so enormous. In terms of larger-scale acquisitions, I always say that Bruce Campbell and the team are -- they've got their hands in every process that's going on out there. But as we've also said in the past, it's -- there's a high bar. There's a high bar for making any -- for writing any checks there because we have such a clear sort of set of priorities right now, such a clear focus on driving discovery+. And that's one of the filters, additional filters, obviously, above and beyond a very significant return opportunity. And as we've said so many times, there are just not as many Scripps type of acquisitions out there. But as always, we'll certainly take a hard look at everything. We're also committed to our investment-grade rating. I think that's a very important point. We've worked really hard to get a very healthy balance sheet. We had to lever up a little bit to be able to afford the Scripps acquisition. We've worked really hard to bring that leverage back down. We're comfortably in our target range right now, 3 to 3.5x AOIBDA. That's not going to change. Obviously, we will use the flexibility we have. As I said, if we need to lever up a little bit as we make these sort of short-term investments, that we'll see very significant revenue offset in the very near future, then we'll certainly make use of that flexibility. And then if we come to the conclusion that there is excess capital, then we'll certainly discuss returning that to shareholders again. But for the near future, it's just not a priority.

Okay. And it looks like we have one question from the audience. You did talk about this a bit, but just in case you want to add anything, I'll ask it. They guided to -- you guided to improvement in the U.S. with half of new adds being in the U.S. What's the impact to international affiliate given half of new adds are coming in international?

It's actually a good point. We didn't discuss the outlook for international. Let's take a step back, talk about affiliate. Certainly, as we've seen here in the U.S. as well, there should be a little bit of sequential improvement. But again, keep in mind that the impact just from a relative perspective is not as pronounced yet as the subscriber ramp is going to be a little more back-end loaded. On the ad sales side, a similar story as in the past. In Q3 and Q4, we expect further -- clearly a further sequential improvement here. It's actually worth a short discussion here. Europe, as we've said on our earnings call, has individual pockets of growth. And we continue to expect individual markets like Poland, U.K., Italy even to be positive here. APAC is working very well for us right now as well. And LatAm remains to be seen, but I think there's a glimmer of optimism here as well. The Brazilian market looks like it could turn positive as early as March or April from an ad sales perspective. So there's certainly some pockets of optimism there.

Okay. All right. Okay. Well, why don't we wrap up there? Gunnar, I want to thank you again for joining us today as our opening speaker today at the conference. And thanks, everyone, for joining us. Have a good day.

Thank you, Bryan. Hopefully in person next year.

Absolutely.