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

Very pleased to have Gunnar Wiedenfels, CFO of Warner Bros. Discovery. Gunnar, how are you?

Good morning. Good. How are you?

Doing great. Doing great. If there are questions that you want to ask in the audience, just please be sure to hit the button just below the white arrow, just so we make sure that the question gets webcast for the broader audience. Did you have a good holiday?

Very good.

Nice.

Much needed, a couple of days of quiet.

Of course.

Ready to go for this year.

All right. All right.

Well, we're approaching, I think, 1 year following deal close. And I ask -- I suspect the strategic rationale for why you did the deal is still very much intact, but we're even getting questions on that front from investors, right? People are so pessimistic about streaming. There's just big questions that are out there. So I'm just going to ask you to just sort of describe the strategic rationale at the time of the deal. Has anything changed in terms of the strategic logic for the transaction? And then things that you've learned over the last year that you think are most salient, that maybe you didn't know a priori.

Yes. We've learned a lot. Let me take a step back and set the table a little bit, if you don't mind. This conference here is really timely for us this year because the beginning of 2023 really marks the beginning of a new chapter for us. We're closing chapter 1. We're opening chapter 2. You're 100% right, there was a lot of discussion last year around what was going on with Warner Bros. Discovery, what was going on in the industry. Our team has worked really, really hard throughout the entire year, literally 24/7 in many parts of the company. We had to come in strong and make very swift decisions. David put a top leadership team in place. And in a way, we were able to take advantage of the fact that a new team was starting as a new combined management team for a new combined company, and we took advantage of that. And we took the courageous decisions that had to be made. And what's interesting to me is that a lot of that was seen through the lens of synergy, integration, the debt, et cetera. The reality is, it had very little to do with that. The industry change that has been going on over the past 18, 24 months has been pretty dramatic. And the new team that David put in place with CEOs for each of the business units, they just did what had to be done, which is take a fresh look at what's working, what's not working, what parameters have changed, how are we going to look at content investments, where are we going to spend, how are we going to collaborate across this integrated portfolio. And they quickly made the right decisions to set the company up. So 2022 was a year of restructuring. 2023 is going to be a year of relaunching and building the great foundation that was laid last year. And to get to the point of the strategic thesis, I think it's not only intact. I think the long-term earnings potential of this combined company may actually be greater than what we thought we were going to find when we initially started debating this deal and put together our initial models. And the way David had laid out the 3 strategic pillars: the unrivaled ability to generate world-class content on the one hand, an unparalleled distribution footprint with access to all monetization windows and cash registers around the world on the other, and then combining those 2 with a professional one company management approach, that's intact. And we're actually seeing a lot of great proof points that are starting to come through on the content side. We talked a lot last year about the enormous success that HBO has had with 37 Emmys and Warner Bros. TV as well with another 10 or 11 awards on top. We -- we're going into 2023 with a much greater slate. We're going to be ramping up production across large parts of the company. You'll see twice as many theatrical releases. We've got some exciting games coming up. So on the content side, we're in great shape. On the distribution side, we've always been very clear that we're viewing Warner Bros. Discovery as one portfolio, a balanced portfolio of media assets and media outlets, if you wish. Never sort of going all in on D2C. Never going all in on linear or theatrical. It's about the combination of all of these platforms. We've seen very positive signals. The theatrical world has obviously recovered not to the pre-pandemic levels, but a very solid year relative to the performance in '20 and also '21. On the linear side, our affiliate teams have worked 24/7 throughout the fourth quarter. We renewed deals worth more than 30% of our U.S. affiliate revenue in the fourth quarter across the affiliate landscape, bringing the entire value of this portfolio to the table. Got these deals coterminous. And it's just a great proof point for the value that our linear portfolio is bringing to affiliates and to our consumers, our viewers. And that gives me a ton of confidence. We get a lot of questions about what's going on in the linear world. There's a lot of longevity in that business. And I think the deals that we've been able to strike are a wonderful testament to the value of that business. But also on the D2C distribution side, the teams are really working hard at getting that combined product launched in the spring, and they're on track. That's going to be very exciting to finally bring together discovery+ and HBO Max. But we've also made significant progress within the existing technology footprint. We've seen continued subscriber momentum through the fourth quarter. And that is despite a certain amount of pullback on the branding and marketing side, obviously, in anticipation of the new product launch. So that's very pleasing. We've launched the Amazon deal in the fourth quarter. But across the board, we've seen better engagement, better churn than we had originally modeled. So net-net, we put out this long-term vision for the D2C business as one additional element of an integrated media portfolio, with U.S. breaking even in 2024 and then $1 billion of global profits in 2025. If anything, I mean, we're doing a little better than what we had modeled out than when we put that together. So great progress on that front as well. And then maybe most importantly, I can't emphasize enough the idea of managing this company professionally as one company. That's been the most fascinating part of the journey that we've been on for the past 8, 9 months. The top team that David has put in place, some of the greatest creatives in the industry running their own business units, but with the greater benefit for Warner Bros. Discovery in mind. There is so much data that historically hasn't really been used in the decision-making, and the team is collaborating really well when we discuss windowing, when we discuss allocations. We're in the second or third inning when it comes to setting up the tools and processes, but the team is collaborating really well. And importantly, from my perspective, we really have command and control over the business now. There were some surprises in the first months of the combination, as you know, but we put out the guidance for this year in the summer. And I've been very, very pleased with all of our operating trends over the second half of the year. And as such, I feel confident that we'll get to those improvements that we've been talking about, much better cash flow generation, growing the profits, flowing through the value capture from our transformation activities. And I think we're really on track for a lot of asset value creation and free cash flow generation. So with that in mind and with the scale that we have, with the creative talent that we have, the global distribution footprint, if anything, as I said at the very beginning, I think thesis is stronger today than it was 18 months ago.

Super interesting. This -- listening to investors is interesting. I'm just going to sort of tell you sort of a quick narrative. But when interest rates were very low, of course, everyone just wanted growth. And then interest rates went higher, and everyone wanted profits. And what's been interesting is we started to get questions from investors where they're saying, people shouldn't do DTC. We should just have a bunch of media companies that become wholesalers, right? They should just feed their content to others, right? And that's what I meant by people sort of challenging the strategic rationale of the deal. But what I'm hearing from you is it's no change in message, no change in strategy. We're just executing and willing to reiterate all of those long-term targets.

Yes. And look -- but as I said, Jason, the truth is in the middle, right?

Yes.

I mean we've been very, very clear. I mean David said in the very beginning of this journey, something like we're not in it to -- we're not trying to win the spending wars.

Balanced. It's balanced.

About how good the content is, not how much. And there's no doubt to me. And look, we got a lot of public noise about some of the content write-offs that we took, which is a reflection of an industry that went overboard and that went on a spending frenzy. There was a lot of thinking of let's do more and more and more, not necessarily let's do the exact right things. Let's do what works. And we've said before, we have the ability, the benefit to be Monday morning quarterbacks here. And Mike and Pam on the film side and Channing and Casey and Kathleen, they're all going in and taking stock. They're -- it's a new day. They're looking at what works, what doesn't work. They made these decisions. We took a little bit of time to make sure that we do it properly. For some of the titles, we found new homes elsewhere, et cetera. That's why this took 6, 7 months. But I think we've come to great solutions, and most importantly, we're done with that chapter. That was very important to all of us to really use 2022, leave the purchase accounting behind us, leave those initial strategy changes behind us, get it all out there in terms of our restructuring estimates and then be able to turn the page and move forward. And again, I think the team has laid a great foundation and really excited about the growth from here.

Okay. So with that behind us, there's also the macro environment. And of course, everyone has been on pins and needles since March, I would say, over the last year about this broader economic slowdown. And I think even you have sort of -- your firm has made some comments about maybe less visibility into the ad market in the past. So can you just talk about your view of the broader sort of ad market? And as you sort of talk about those long-term targets that you talked about on the DTC side or overall leverage, what sort of macro environment are you contemplating?

Well -- so I mean let's start by acknowledging that it's a pretty unusual set of geopolitical and macroeconomic parameters.

Sure.

And against that backdrop, we had actually been pretty clear since as early as last summer about the ad market being a risk factor, and we spoke about it. The good news is that when we put together our guidance for this year, that was a scenario that was in mind. And we actively manage the company from as early as August, September with these environments in mind. So that's -- back to the command and control point, no big surprises here. That said, in the meantime, you've heard from others as well that the trends have just not been great. And I think it's fair to say that trends have also not gotten better, if anything, gotten worse through the course of the fourth quarter from a U.S. ad market perspective. And while we're seeing some small green shoots for Q1, I wouldn't want to call the turn here yet. It's a little more mixed, good and bad internationally. We've got some markets that are equally negative such as U.K., Germany, but we have other markets like Poland, Italy, Latin America for a wide part of the footprint there that are actually doing fairly well. But again, what matters to me is this is short-term noise. Yes, it's obviously high margin flow-through of these revenues, but I have no doubt it's going to come back. And again, if anything, the most recent experience with our affiliates and the deal renewals shows that there is enormous value in that ecosystem. And we've always seen it come back. And I have no doubt that when it comes back, and I'm not going to make a prediction if that's going to be in Q1, Q2, whatever, we'll find out. I don't know that any better than anyone else. But I have no doubt that when it comes back, we're going to be participating disproportionately just because of this enormous reach of our portfolio, the ability to optimize content spend across this broader network portfolio. And frankly, the fact that we're still in the ad market monetization, that we still have catch-up potential that we've been able to chip away again and again for the past couple of years.

That's great. On synergies, you recently raised the long-term synergy target from $3 billion to $3.5 billion and said $2 billion of that will come this year. Based on the work that's underway, I assume nothing's changed on the synergy front. You still feel good about that?

Yes. Look, this is actually one of the most inspiring parts of this combination for me. We're essentially doing the same thing again that we've gone through with Scripps and Discovery. We've got a proven methodology. We've got an experienced team that's done this before. And I was just exchanging e-mails over the holidays with a number of the individual initiative owners. And it's just -- it's so great to see what you can unlock with a delayered organization, with people feeling that they actually have the ability to make a real impact to come up with an idea, put a price tag on it and then grab the ball and run. It's absolutely amazing. It's contagious, and it's spreading through the organization. And as I said earlier, we set this original $3 billion target. Obviously, the pipeline is much, much fuller than that. And that's why we raised the expectation to $3.5 billion in terms of delivery. We're still adding ideas to that funnel, and I have full confidence in what we said earlier that we're going to see at least $2 billion of additional value capture flow-through. But I also want to reiterate, there was -- this started as a synergy program. It's really a continuous improvement program. We are just consistently and continuously looking at how we're running the business, how we're running the company, what makes sense, what doesn't make sense. And we're setting up the company for future growth and value creation regardless of the integration or the transaction in and of itself. But there's a lot of opportunity. And as I said before, part of the upside here is that we're really integrating 5 or 6 companies given the very divisional setup and, frankly, suboptimal system and process setup for large parts of legacy WarnerMedia. So very, very exciting. Everything we've learned over the past month since we last spoke has been positive.

So in terms of the $12 billion adjusted EBITDA guide for this year, you, I think, recently -- sort of relatively recently added the caveat of assuming a normal ad environment. And I was just wondering if the sort of slight erosion in the ad market that you've talked about that's sort of happening now, if we end up in just a sort of plain vanilla recession, not a COVID recession, not a great financial crisis recession, just a plain vanilla recession, how would you help investors sort of frame how should they should think about the downside to that $12 billion number? If it's not a normal ad environment, it's just a normal recession.

Well, what is a normal recession? So we're still working through the various scenarios and haven't finalized a budget. So I want to be careful here with sort of giving out any new numbers. But a couple of things I think that are worth considering to your point from the perspective of how should investors think about it. The ad market environment clearly is the #1 swing factor, positive and negative. And as I said, I'm not calling the turn here for Q1, and we'll wait and see. The things that we're focusing on is what we control. And there's a lot of very positive building blocks that are going to come through. We've already covered the incremental $2 billion in value capture for next year. There is going to be, as we indicated before, significant improvement in the profitability of the D2C business. And again, just taking a step back, we've got this amazing combination. We're making the tech investments that are necessary, but that's essentially just a onetime, resetting it to a new technology backbone. And then obviously, you got to keep maintaining that, but it's an investment that we're making right now. And then we very soon should have a state-of-the-art setup there. On the content side, I have no doubt that we'll always be more efficient than anyone else because we have that great access to talent, to creativity. We have a massive IP library that we can exploit. We have the data to inform decision-making here. And frankly, we have this global footprint that we're utilizing our content on, not on one single platform. So I think we're going to -- we're always going to have a competitive advantage here. And then frankly, one thing that we have started leveraging much more and that we're going to see more of next year as well is this enormous marketing power that the company has. We're reaching tens of millions of people every day in the U.S. alone, and we're harnessing that to get behind our key content priorities. So that's going to be a significant positive driver for next year as well. On the revenue side, as I said before, you're going to see a very significant increase in film output content in general, games as well. So there are a lot of positive building blocks that we, at least to a large extent, control. The big negatives or question marks are what the environment is going to be like. I'm not going to lay out any sort of base case, upside-downside case scenarios. You guys all know that as well or better than I could model it. But that's really the question mark right now.

Okay. Okay. So I don't feel like you gave yourself enough credit early on in the conversation that when investors were clamoring for growth, you guys always focused sort of on this DTC business being for profits and for being more balanced. But I want to ask you a question about content spending. You said theatrical releases will go up, but what do you think is going to happen to aggregate content spending across the whole industry? Do you feel like we will look back on 2021, 2022 and say, wow, that's the high-water mark, and everyone will begin to get a bit more disciplined and content spending will go down in the aggregate, not just on DTC, but just in the aggregate?

Well, I wouldn't go so far to call it a high-water mark. But what I will say is, as you all saw very publicly, we shaved off a lot of the excess last year. And I think that's something that everyone else in the industry is going to go through. We're coming from an irrational time of overspending with very limited focus on return on investment. And I think others are going to have to make some adjustments that we frankly have behind us now. But I think that is going to be a factor. For us though, we've rightsized the content spend. Again, I think we have a huge advantage in the enormous amount of data from all the different consumer touch points that we have. I think we're going to get a lot better in allocating capital, and we have every intention to continue spending. Content is the lifeblood of this company. We are a content company. Again, we've got the ingredients in place. It's obviously a hit-driven business. You win some, you lose some. But if you look at the creative lineup that David has been able to assemble, this is a first flight lineup of creative talent. I got so much positive feedback on some of the announcements. James Gunn and Peter Safran are working on a DC lineup and are getting close to being able to communicate a plan. We got Channing, we got Casey Bloys with his winning team in place. So we've got that. Some of these changes might take some time, obviously, given the lead times for content, but we've got the team in place. We've got the most iconic IP and brand portfolio that I could think of. We've got a global footprint. We've got the data, and we're putting in place the management system to bring this all together. So from the perspective of the ingredients being in place, I don't think we could be in a better position. And now we've got to execute.

How much -- on content spending, since we don't really know how the linear business will fare, right, and we don't really know exactly how the DTC business will fare for the industry, how much fungibility would you say that there is across those 2 buckets? I mean clearly, sports is sort of a contractual piece that I'll just push to the side. But as investors sort of think about how much flexibility you have in terms of where you direct the funds for new content, how would you characterize that?

Well, to your point about sports, there is some flexibility there as well that we can talk about. But look, I think that's one of the great strengths of what we're putting together here. We've got this massive library, and we've got all these platforms. And one area where if you look at what we did last year, we've made a lot of small steps into experimentation. There was a Thanksgiving West Wing marathon on HLN. Those are the kinds of things. It's small individually, but you've got to try these things. We've got this massive library. We've got this portfolio of networks. That was one of the big drivers for the success of the Scripps/Discovery merger that we were able to play with programming strategies a little bit. Kathleen has perfected this. And what's exciting right now is that the new team's willingness and ability to cooperate and talk about you've got that in your library, can I drive this here, and to talk about the windowing and to, for the first time, ironically, to bring together all the data that we have and all the knowledge that we have about what works, what demos were sort of over-indexing, et cetera, we can bring that all together. And so as such, I think there's going to be an enormous amount of flexibility. And you've seen some of our decision-making already, that we're willing to take that perspective and make rational decisions. And we don't have to have everything, every last title fully exclusive. There may be other ways to monetize internally and, at times, externally as well. And we're willing to run the numbers and form a strategy and make those decisions.