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

Okay. For important disclosures, please see the Morgan Stanley research Disclosure website at morganstanley.com. If you have any questions, please reach out to your Morgan Stanley sales representative. And I'm really excited to welcome to our TMT conference from Warner Bros. Discovery, Gunnar Wiedenfels, CFO. Gunnar, thanks for coming.

Yes. Thank you. Excited to be here.

Great to have you.

So we are almost 1 year in to the merger with WarnerMedia. And I often think of you as maybe the hardest working guy in media. Can you talk about what you guys have been working on over the past year, bringing these 2 companies together? And really the opportunity that you still see ahead for the combined entity?

Yes. The 11-month point is actually an interesting one. Because David and I, were talking the other day, and we probably put 2 to 3 years' worth of work into 10 months.

Like when they show the pictures of their President, before and after.

Oh my God. Look, I mean, there's no doubt, it was a challenging year, starting with the geopolitical backdrop, market environment in the second half and then obviously, our very unique merger-related task that we had to work through. But I'm incredibly proud of how we got out of the year. I mean, in this tough market environment, we hit our numbers, generated $2.5 billion of cash in the fourth quarter, which has been one of the most important point of this combination, this enormous opportunity from cash generation, short-term and longer-term sustainable growth. And so that's a very important point that we put on the board. We're on its [ hair ] creatively, both when it comes to the production side with Shrinking, Ted Lasso coming back, Abbott Elementary, Night Court and so on and so forth, but then also for HBO Max. I mean The Last of Us just a juggernaut in the game space. We got Hogwarts Legacy on track to be the biggest Warner Bros. game launch ever. So lots of things are going very, very well. And then on top of that, I'm very pleased with how the entire team is coming together. We talked about, there's $3 billion synergy bogey, raised the expectation to $3.5 billion, recently raised it to $4 billion got a lot more in the hopper. The entire company is getting behind that. And then most importantly, from a culture perspective, which as you all know, is one of the most critical pieces of a merger and a post-merger integration program, and that's gelling very, very well, both on David's leadership team and in the broader company. We're really all getting behind that one Warner Bros. Discovery mindset, and we can talk more about what that means because it's the thread that goes through the entire company here. So I think we're off to a great year 2023, lots on the to-do list, but certainly a position now, where we're reaping the benefits of all the hard work of last year.

So let's talk about the to-do list a little bit. David talked about 2023, described it as the year of building, after last year the year of restructuring. So what are you building in that context? What are the key investment priorities for you and the company this year?

Well, we're investing, obviously, mostly on the D2C side and on the studio side. And we're really getting the benefits of some of the tough decisions that we made very early, the last year. And so if we just go through business by business, we've got a lot of growth opportunity here, starting with the film business, where we're looking at a slate of 12 releases, doubling last year's number. And Channing Dungey is in the market on air with more than 100 shows for the TV production side, including a number of real recent hits that I just mentioned. The Warner Bros. games business is off to a great start with Hogwarts Legacy, which I think is sometimes -- that business is a little misunderstood or underestimated. I mean Hogwarts Legacy could be the foundation for a decade worth of returns on that investment. So that's a great start, and we have 5 more games in the hopper for this year, again, a significant step-up from prior year. And then on the D2C side, obviously, hundreds of people in Warner Bros. Discovery are heads down working on that launch of the product -- the combined product in the second quarter. This year, that's on track, and it's an absolutely critical milestone because, for the first time, we're going to be able to come out with a combined product, all of our great content in one place with a state-of-the-art user experience. So that should be a big milestone. And JB is going to talk on April 12 about some more of the detail around packaging, pricing, go-to-market, branding, et cetera. So a lot of very, very interesting and promising opportunities.

April -- that's the press event you guys have talked about?

Yes. Correct.

Okay. Okay. You also, on the call, talked about 3 strategic pillars, and I wanted to maybe frame the rest of our conversation around this, Gunnar.

Yes.

The best storytelling; the broadest audience; and working as one company. Maybe we'll take them in order. So you talked about storytelling. I mean that's clearly a creative endeavor, right? You like them all make hits, but not that simple. What enables Warner Bros. Discovery to be successful around creativity, particularly in an environment that is crowded, which I think you guys use that word from a competitive point of view? But also an area where you're pulling -- you're spending less money probably than the company was going to spend sort of pre-merger. So less capital, highly competitive market, and yet you guys are obviously confident in your ability to execute there.

Yes. I want to actually start with the last one, spending less money. I want to clarify something. I view this as having shaved off that excess. We didn't abandon anything that would have made any sense strategically or financially. And so that is obviously something that I think over time, while we got a lot of criticism, especially in the press at the time, at this point, I think a lot of our peers and others in the industry have kind of made similar decisions. So we haven't abandoned anything that made sense, and we're very committed to continuing to invest. To your point about how we think about the best storytelling, a couple of points here. Number one, when we first announced this deal, we made a big point of the fact that this is a storytelling company. And so among those 3 pillars, this is really, first and foremost -- and it's the most important one. We're, first and foremost, a telling company. There's no packages, no web storage, no phones tied to it. We're in the media and in the storytelling business. And that really resonates so well. Since we closed the deal, there's not one talent relationship or a deal that I could point to that has suffered in any way. If anything, it's the opposite. David was talking about a revolving door the other day because people come to the lot. People want to be part of this. And that takes me to the second point. I think the different approach that we're now taking. Managing this company cannot be overemphasized. We are managing Warner Bros. Discovery as one company. And so people can come in, and there's a discussion around films, there's a discussion around TV, and we're working together. And so we're jointly working on finding out what the best option is for anyone who wants to work with us, and that's a great opportunity. And our creative leadership team is collaborating at a level that I think just wasn't there in the past, and that resonates in the creative community in a major way.

Makes sense. You also talked about the broadest audience, which I can't help but think about, and you sure can push back on this, that, that is a stark contrast from the sort of streaming first strategy that has kind of dominated the industry over the last few years. It would seem, and I think your investors probably are looking for this, that this is an earnings positive to distribute content more broadly, which also sounds like monetize it more broadly rather than putting everything on HBO Max. So could you talk about sort of the earnings impact kind of near term and long term from this second pillar around distributing content for the broadest audience?

Yes. No, you're 100% right. It's a huge positive. And if you just look at the past couple of quarters for Warner Bros. Discovery, you already see the implications. I mean we reduced streaming losses by more than 500 million year-over-year and significantly sequentially as well. We guided to, give or take, a breakeven quarter for Q1 of 2024. And it makes perfect sense. Look, the way I look at the streaming exuberance over the past decade, maybe it was fueled by 0 cost capital. And there's a reason why for decades, the entire industry has looked at a number of exploitation windows adequately priced to optimize the return on investment. And we're returning to that. And as a matter of fact, one of the things coming out of this conference for me was a bit of a positive notion around the theatrical windows, some of the openings that have worked very well. And we know the value of that, and we're seeing it in our numbers. We're seeing the difference that it makes to open the film in theaters and then getting the benefits on all the downstream windows. And one of my priorities is to set the company up in a way that we harness all the data that we're generating across these various distribution platforms to come up with the best decisions. And it's also one of the areas where this one WBD mindset is so visible. We're sitting down and we're talking about how a film is doing in theaters and whether it makes sense to leave it there for a couple of extra weeks. By the way, a flexibility that we -- that the industry didn't have before COVID or whether we move it over to HBO Max earlier. And it's great to see how the entire leadership team is aligned behind it, because we know we want to do the best for the combined company and not for some particular business unit-specific metrics. So -- and I just want to be clear, we're in the second inning there. I mean we have so much work to do. WarnerMedia was really operated in these business unit silos. Everybody has their own system and said that we're making some progress, but it's still a way to go to get this combined harmonized data platform, but we're making great progress.

And you mentioned getting the streaming losses down and breakeven. Clearly, there's been cost benefits to the pivot. But when I think our broadest audience, I'm also thinking about revenue opportunities as well. Do you see those?

100%. 100%. And again, the -- part of that is tied to the tiering of a product. And David has been very vocal about a step into the FAST market as well. We want to be serving all consumer segments in the way that they desire to be served. And I have no doubt that there is a revenue opportunity. And we also talked about the fact that in an environment where -- I think that's true for every streaming service, right? You have an 80-20 rule, right? 20% of the content is driving 80% of the viewership. So this idea of everything has to be exclusive on my platform financially is nonsense. And so we're going to change that. And take all that together, starting from the studio where we have enormous enormously talented creative teams, a library, tent-pole IP, franchises that have been underutilized and undermonetized and then overall the distribution platforms that we have. I have no doubt that we're going to be the best place to get sustained high returns on every dollar of content spend that we make.

And Gunnar, I guess the obvious pushback from a cynic would be the industry is swinging back towards legacy distribution models because it needs to generate earnings and may have -- may even be prioritizing deleveraging. And yes, earnings go up, but the multiple goes down because you're sort of pivoting away from streaming and streaming to the future. What's your response and then maybe that push back to what we're seeing in Warner...

It couldn't be further away from the truth because nobody is swinging back to anything. We're just starting to put some rational decision-making into managing one arguably, very, very important distribution platform in streaming. But that needs to be managed as one business in addition to all the other models. And again, the way I look at it is I want to make sure that we have the creative relationships and the creative firepower to be generating the best stories in the world and that we have a commercial machinery that allows us to extract the best returns for that content from whatever platform is available. And again, by no way -- in no way are we saying we're going to pivot back to linear. So we know what the trends are in the industry, but we want to use all cash registers that are available to us to get the highest return on every dollar spent. And that's what we're focusing on. Streaming is incredibly important. And I have no doubt that with the combined product that we're launching for the first time, all of this powerful IP on one platform, we're going to see better churn. We're going to see better engagement, and we're going to see a revenue inflection once that's in the market.

I want to get into the segments, but I want to make sure we hit the last pillar, which is one company. David said it twice on the earnings call. So I know if I didn't bring it up, we'd be missing something. I'm actually thinking, I think you're the third owner of the Time Warner assets at this conference that we've had over the past several years. But it sounds kind of soft, but what is -- it's really important. So what does it mean to shareholders and investors in WBD, you're operating as one company?

Yes. It's not soft. It's arguably, again, almost a year in, the single most important change and I think the single most important value driver. And again, forget about the fact that every business unit has their own ERP systems, processes, et cetera. That's all what you refer to as [ below deck ]. My team is going to clean that up, put in one system, much better efficiency, command and control, et cetera. But what really matters is -- and that's actually something that I've heard from so many people in the WarnerMedia side, they're really embracing the decisiveness, the speed to decision-making and the fact that we're not only talking about one Warner Bros. Discovery, but that we're actually making decisions in the spirit of optimizing for the entire company. And that was a bit of a conceptual theme and really came to life, I think, for a number of people when we had our Senior Leadership Summit in L.A. earlier in the year, where we looked at a number of very specific use cases, and I think it clicked for many people. And we've got a new process to harness our entire media firepower behind company priorities, be that House of the Dragon or Black Adam or other launches. It is reflected in the way we talk about windowing. It's reflected in the way we make decisions between TV production, HBO, the networks and so on. So it's a very, very important point, and I think it's going to help us optimize the growth opportunity coming out of this combined company with a specific focus on franchises. And that's an area where I think we've got the largest opportunity. And I think managing Warner Bros. Discovery as one company is one of the most important building blocks to better utilization of the franchise IP that we have.

Okay. All right. Let's talk about synergies and free cash flow. So I think now you've raised your synergy targets from this deal. You're up to $4 billion. I think you recently raised by $1 billion. Maybe tell us a little bit about where you're finding additional opportunity. And you also highlighted on the earnings call sort of a $5 billion maybe stretch goal or how you would describe it. So help us think through these opportunities and...

Yes. Look, I don't want to spend too much time on it because it's really the one thing that I really don't lose any sleep on. It's a machinery that's up and running. It's driven by a muscle memory almost for many people in that team. We literally had that team still running from the Scripps/Discovery integration. So we came into this with a lot of learnings. And as I said, muscle memory. $5 billion is the amount of synergy value that we have in the system that we're tracking on a week-by-week basis. And I'm just taking -- and when I brought up the number, I'm not -- there's not like one new initiative that, all of a sudden, brings the opportunity up. It's just a growing level of confidence in our ability to deliver against these initiatives that are in the system. And when I talk about an initiative, it means an idea that has a fully detailed milestone plan and an owner, a time line cost to achieve and a savings or a revenue opportunity against it, even though we don't count revenue in our numbers. And it's going very well. And I view this as a continuous improvement program. We are still generating new ideas that are coming into the top of the funnel as we deliver on what else is there. So I feel very, very good about our ability to drive that.

And how are you feeling about the free cash flow conversion guidance you've laid out for us over the longer term?

Very good. Look, I mean, as you know, with the market environment and some of the changes last year, we're -- the numbers are a little lower than we had -- than what we had originally anticipated for this year. That's no secret. But nothing has changed in terms of our overall conviction here of our overall plans. We continue to see a 60% conversion rate long term for the company. I'm very comfortable with the 1/3 to 50% conversion in the short term. And we see EBITDA growth opportunities. We see a more balanced relationship between content amortization and cash spend. We see cost to achieve and integration expenses coming down. We see interest coming down. As I said on the earnings call, we're going to be well below 4x by the end of this year, and that's obviously going to have an impact on future cash generation. And I do think that there are many additional bites at the apple. WarnerMedia was never managed with a cash focus. And we're going through a lot of process changes, starting very early in the process, sort of integrating a cash thinking into the original design of contract, templates, et cetera, as opposed to how many people look at it. Cash management is making calls at the end of the year to collect. So there's a lot of opportunity.

Okay. Great. Let's talk direct-to-consumer. So we obviously have this new product coming to market relatively soon in the U.S. I was pushing you on the earnings call about overall direct-to-consumer revenue growth. And I know you have long-term targets for EBITDA and you're going to manage expenses. But it seems like revenue growth reaccelerating is pretty key. So talk to us about the drivers of that and your confidence around getting the revenues where you need them to be to hit the $1 billion of EBITDA in '25.

Yes. Look, we have confidence in the value of that product. And the -- as I said earlier today, the relaunch or the launch of a combined product is absolutely critical because, for the first time, we're going to be able to put all the content together. We believe that, that's going to have positive impacts on engagement, on churn, on subscriber acquisition. So all the way through that entire value driver tree, we believe we'll see improvement. And one thing to always keep in mind is that when we talk about our HBO subscribers, that always has that linear premium HBO number built in, which obviously is subject to some similar trends as everything else in the cable universe. But on a net basis, as I said before, we're looking at a revenue inflection for the product, and the team is making fantastic progress. The April 12 launch event is going to give you a lot more detail on a number of the go-to-market decisions, but that's one of our big, big priorities for this year.

Should we have any expectation that we'll see a relatively immediate impact to revenue when you roll out this new product? Or you also have some discovery+ customers, I believe, right, that you have to sort of work through, right?

Right. Yes. I don't want to get too specific, Ben, because you're right, there is the transition, and that's also an area that the team is very, very focused on, on a very granular basis, going through all the different cohorts of subscribers on one platform versus the other wholesale versus retail activated, not activated, et cetera. And we have detailed transition plans for each of these groups. But needless to say, every interaction with the subscriber from the perspective of transitioning a product is not only an opportunity, but also some risk. We have a lot of experience with successfully managing that, both on the legacy WarnerMedia and on the legacy Discovery side. The last thing that I've been closer to was the Eurosport to discovery+ transition in Europe, which was extremely well managed. A completely negligible amount of -- or number of subscribers that we lost in the process. But obviously, this is a big one, close to 100 million subscribers. So the team is very, very focused on it. And we'll update the market more as we go through that process.

Okay. Last question on D2C. There has been -- maybe a little less today, but a lot of enthusiasm about ad-supported streaming. What's been the experience so far with HBO Max and its ad tier in terms of customer interest and advertiser monetization potential?

Look, I think beyond subscription pricing, which we've talked about before is a driver of growth, advertising, monetization, clearly is up there as well. And I think we're very well positioned. We've got a lot more inventory coming to the market. We've gradually opened up the HBO Max ad-light tier for advertising. We're seeing advertiser interest, specifically in sponsoring opportunities. But it's early days. And again, the big longer-term upside opportunity here is getting more scale on those platforms because that drives better targeting opportunities, better pricing, et cetera. So it definitely is one of the key drivers for us. And as you know, both discovery+ and HBO Max have been pretty early in leaning into that advertising opportunity. And we continue to see that work. There's a lot of incremental value coming out of the -- what I would call the ad ARPU on top of the subscription ARPU.

Okay. Let's talk about the business that really pays the bills for you guys at the moment, so to speak, which is the networks business. Lots of industry headwinds people are well aware of. But how are you in David thinking about these assets over a longer period of time? Like what's sort of the strategic focus for the Turner network and CNN? And maybe talk about the role of sports in making sure these networks can, at a minimum, defend the revenue base.

Yes. Yes, look, I mean the positioning is very clear. You said that they're paying the bill. It's a classic cash cow business. So we're supportive and we're investing behind it, but with a very clear view on free cash flow and ROI. And I think there is a lot of opportunity. We've gone through this conceptually many, many times. And in fairness, we've delivered that when we combine Scripps and Discovery. Kathleen Finch, like no one else, has been able to harness the power of that portfolio, and she's going through that process right now as well. It's early days, but she put a team in place of hands-on doors, development-focused executive who are managing this portfolio. We're tapping into the content library, the large content library that we inherited with this combination. And the objective is to put together a cross-portfolio programming strategy that will put us in a position to get back to outperforming the industry as we did after combining Scripps and Discovery. And then on the monetization side, we're going to continue to be very focused on the value of our inventory. The upfront last year was focused on price. You could argue that, in a way, that hurt us a little bit on the short end as the scatter market went away in the second half of the year. But I have no doubt that we're very, very well positioned for when the market comes back. And we are still under monetizing on the ad sales side. From an affiliate perspective, I think we're in a good position. We have seen some great success as we renew deals in the fourth quarter. We have a really compelling portfolio, essentially covering the entire spectrum of genres. And I think we're going to be in a very good position. You mentioned the most important swing factor, the market. It needs to come back. We've just talked about that 2 weeks ago. And I don't want to give an update today, partly because we have a bond in the market that's priced but not sold. So I got to be very careful on anything.

That was my next question.

No comment.

How important is the NBA? And are you confident you can retain it in a way that you can manage from a financial point of view?

Look, I want to take a step back here and talk about sports more broadly. Sports are an incredibly important part of our strategy and will be, already was for the 2 legacy companies and even more so on a combined basis with a very strong footprint in Latin America and Europe and the U.S. So I think we bring a lot to the table for the leagues. We have a great portfolio of rights. And I think we are a very uniquely positioned, very strong partner. And I'm happy with the rights portfolio that we have with the NBA, NHL, NCAA, et cetera. And the one thing that's not going to change is we will make rational deals. It's not always black and white in terms of what the value is, but we do the work and we come up with a very solid view of what the value of a certain right is to the company. And we're not going to -- you're not going to see us do any vanity deals or buying performance, which happens a lot in the sports space. We're going to -- we know what the value is and we know what we're willing to pay, and we're willing -- we know what we're not willing to pay. And so that said, I think for the NBA specifically, it's a great relationship. It's worked very well for everyone involved. I think we bring a ton to the table 18 years of inside the NBA. We got Bleacher Report, House of Highlights. And in the future, you could talk about all kinds of expansions into the digital space. And I know the NBA values at -- and that exclusivity in the negotiation window that the split with Disney works very well as well. So we'll see.

Okay. We've unfortunately left 90 seconds for one of the more exciting parts of your company, which is the studio.

Good.

So in short order, I want to make sure we at least give you a chance to talk about the big changes that have been made at the DC Studio. You've sort of reorganized that business. There's a lot of excitement. Flash has been mentioned a lot over the first few days of this conference that you're screening at CinemaCon. But what should we think about as the growth algorithm for Warner Bros. Studio? And what do you guys have there?

Well, I already mentioned earlier some of the numbers in terms of increases in releases. But just very, very briefly, DC, I think, an enormous opportunity. And I think 2 important building blocks are in place now, the leadership team with Peter and James, and James is breathing comics for as long as he's been alive essentially, a great creative leader here. And the second building block that's in place is the One Company approach because, I think, you can only manage a franchise if everything is coordinated, and the team is working together extremely well. There is an enormous level of collaboration and joint decision-making around what should work hand-in-hand across the franchise. And you can take Harry Potter as an example or Wizarding World, the fact that we are enjoying this massive success with Hogwarts Legacy launch 11 years, I think, 12 years after the last film came out, shows that there's so much opportunity. And we're only just starting to expand that. You've got a new Harry Potter tour coming up in Tokyo in middle of the year. So I mean, a long story short, I think there's One Company approach, great leadership in the individual business units, but coordinated franchise management is probably one of the biggest opportunities this company has.

When are we going to get the Lord of the Rings movie? Or are you going to hide behind the Bond deal on that one, too?

No. I mean...

That was also a big announcement.

Yes. Yes. And look, I mean it comes to the point, David made a promise "very early on" to sort of revitalize some of that iconic tentpole IP. And again, I think we're starting to make progress. And it's exciting to see how many -- how people are coming in and out at the lot and how the creative community is embracing this opportunity to work with us. And that is -- that's going to bear fruit over time.

Great. Any last comments before we wrap up?

Look, I mean, as you -- the way you opened, it was a tough year last year, happy with what we achieved. Much, much better to be sitting here this year with a little bit of tailwind from all the tough decisions that we made and the balance is really shifting towards the opportunity growth and building as we laid out 2 weeks ago.

Okay, Gunnar. Thank you very much.

Thank you.

Thanks, everybody.