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

It's Robert Fishman here again, and we are very excited to have a new guest for us and for most here, Gerhard Zeiler at Warner Bros. Discovery.

And so instead of me just reading your bio, I thought we'd maybe just kick off with you sharing us -- with us your background, your experience. We've had the opportunity to get to know you in a few different iterations of Time Warner, WarnerMedia, and now Warner Bros. Discovery. So I think you joined the company about 12 years ago now, and just love to hear more about your background that you can share with everyone and the responsibilities that you have today.

So first of all, thank you for having me. Look, I started quite early in media, in the public broadcasting of Austria. I'm Austrian. I started as the Administrative Director of the Austrian Broadcasting Corporation, then went to Germany and launched a small channel called RTL 2. Then I went back to Austria to run the Austrian Broadcasting Company. So just to give you a size, it's a small country but still roughly $1 billion of revenues. And then after 4 years, I had enough with public broadcasting TV. So I was offered the job of a CEO of RTL in Germany, the biggest commercial channel in Germany already at that time. There was one network and we increased it to 4 big networks. And then in 2003, I was promoted to at the whole RTL Group. And RTL Group, it's a public company but it's majority owned by Bertelsmann. And at the time, I also became an Executive Board member of Bertelsmann. And I stayed there for 13 years, 13 years since I started at RTL in Germany, so 9 years as the CEO of RTL Group. And then I had a long conversation -- several conversations with Phil Kent. And it took him 3 months to persuade me that I join Turner and Time Warner. And I started as the Head of Turner International. Smaller, much smaller than RTL Group, pay TV, but very interesting first job for an American company. And then when John Stankey bought, with AT&T, Time Warner and renamed it WarnerMedia, he wanted me after 9 months to run the Chief Revenue Officer position here in New York. So responsible next to the international business for global distribution, for global advertising. And then Jason Kilar came in, changed the whole structure and finally put the international business of then WarnerMedia together, HBO, Turner and most of Warner Bros., that I did until David called a few months before the merger and said, I want you to say and I want you to be the head of the international business of Warner Bros. Discovery. So here I am.

We're happy you're here. And hopefully, I can share Phil Kent saying he's one of the best decisions he's ever made is bringing you aboard the company.

So I'll buy you dinner afterward then.

So here we are, right? And so you clearly have had a really interesting seat as you just went through all the different iterations of the company. Wondering if you could share with us just very high level what you're seeing today and really just helping investors understand how international is structured as a business for Warner Bros. Discovery. Clearly, it fits across all the different business segments.

So first of all, to give you a little bit of the size, and that's not new because it was released in the 10-K. The international revenues are roughly 1/3 of the total revenues of Warner Bros. Discovery. And our segments reporting are in 3 parts, it's studio, it's networks, and it's streaming. And we have, in the international business, all 3 segments are meaningful. Still, studios likely are more revenues than international networks. Streaming, currently because we are not in a lot of markets yet, still the smallest of the segment but growing, and for sure, the most important revenue and growth driver in the future. So that's how the size and the breadth of our international business. Now how we are organized is quite simple. We are a matrix company, and there are parts where my team is fully responsible for. So networks business on the international side, for example, the content licensing business, the transactional business. There are parts where especially streaming and us are working hand in hand. And we have one distribution team together. We have one local content team together. We have mostly one marketing team together because that really makes sense to use the synergies but also the leverage, the strength from both sides, streaming and linear. And then there are business units like theatrical, consumer products games, where we help to execute the global strategy. And last not least, there's CNN. CNN, of course, on the editorial side, that's purely done in the U.S. and it should be. It wouldn't make sense to do it differently. When it comes to monetization, partly, they do it themselves. Internationally, partly, we do that. We do the distribution deals for them. We do part of the advertising deals for them. So that's the breadth of the international business. But most importantly, this is really -- and that is something which started with David taking over his, I almost would say, obsession from day one. We are one company. We have a one company mindset. It's regardless of -- the most useless thing is to talk about reporting lines. It's really one company. And that's, at least in the international business, we work that way.

That's really, really helpful to understand. So maybe if we start with linear first because I think that's going to set us up for the future streaming conversation. But maybe just help us understand how each of the key markets -- and I know when we talk about international, us as U.S.-focused, just kind of sweep that all under one umbrella. But when we think about the different key markets, how cord cutting is performing, depending on how specific you want to be, but in the different regions? And really, what does that look like compared to what we all know very well happening in the U.S.?

Look, to say it in a headline, the trend is the same. Streaming is growing, linear is declining. And streaming is growing roughly at the same pace as in the U.S. But there are significant meaningful differences between the viewing behavior in the U.S. and the viewing behavior internationally. And I start with the fact that cord cutting started later in all of the international regions, and it's not as steep as in the U.S. Second, free-to-air, what you describe here in the U.S. as broadcasting, we describe it as free-to-air. Free-to-air is still the key platform when it comes to viewing, how a consumer view video. It's in almost all of the major markets, over 50%, meaning that more than 50% out of hundreds minutes which people watch video is watched on free-to-air. Germany, 72 minutes out of 100; Italy, 74 minutes out of 100; Spain, 69 minutes out of 100; Poland, 58; Brazil, 58; U.K. even, 49%, so close to 50%. So that's the meaningful difference. It's really free-to-air. And I think the number, what I saw in Nielsen [ Deutsche ] in March for the U.S. was something like 23% for broadcasting here, meaningful difference. On the other hand, pay TV is much smaller. It's much less important in international markets. So we have -- in the majority of the international markets, the share of viewing on pay TV is less than 10%. There are a few exceptions like Poland and Mexico. And the reason is that the pay TV penetration in most of the international markets never achieved the size of what it was here in the U.S. And when I look at the pay TV penetration in most of the European markets, it's less than 50%. In some markets like Germany and Spain, below 30%. In Italy and Brazil, below 20%. So that's the reason why when we talk about linear business in most of the international markets, there are exceptions. I mean, Netherlands and Korea are different. But in the main major markets, free-to-air is so important, and we are really glad that we are, in Europe, have a very strong free-to-air business. But I would say for us, the most important thing is we are a truly global company. That's really what is our advantage in international.

Awesome. So let's go to the free-to-air and actually tie that into what we learned on the earnings call last week about the relative advertising strength in some of these key international markets. So I don't know if you want to rank them for us or however you want to share with us. But by region, as we think about Lat Am, Western Europe, Poland has been an area of strength, and Asia Pacific. Anything that we should think about how you're positioned, given the portfolio that you have with free-to-air that you just went through and how that's helping drive advertising dollars going forward.

Look, to give you roughly a picture about the size, yes, I would say, if you look at all of the Warner Bros. Discovery advertising revenues on the networks side, international is roughly 20%, and 3/4 of it comes from Europe, especially driven by free-to-air. And yes, in Europe, which, as I said, is our most important region for advertising revenues, we even have more advertising revenues in Europe than distribution revenues. We outperformed the first quarter, yes. In most of the European markets, we had -- we saw growth in the first quarter in 2 countries, Poland and Italy, which are also our biggest ones, we had even double-digit growth. So a very justifying -- a very satisfying picture in Europe in the first quarter. And this trend of Q1, at least we see continue in April and May, maybe not at the same pace, but we have a very good also picture for Q2. And I don't see and nobody of my team sees this any sign that in the second half of the year, this will change dramatically. Of course, nobody can see and forecast it. There always can something happen geopolitical or macro economically. But so far, no signs that this will dramatically be worse than it was in the first quarter and what we see also in the second quarter. The picture in Latin America is different in several ways. First of all, the advertising revenues in Latin America are much, much smaller. And the reason for that is that we only operate in the pay TV ecosystem. And the pay TV penetration roughly in average in Latin America is something like 26%, 27%. Therefore, advertising is not that important. And it's much more of a distribution play in this region for us. But most importantly, for both Latin America and also Europe, we started in Latin America when we launched Max in February. We started in all the markets, all 39 markets with an ad-lite tier. We call it ad-lite, so a tier with advertising. And that's important because we need to offer to the advertisers both sides, linear and digital. And especially when we look in Europe where we will launch in 2 waves, as you know, in May and in June, we have 9 markets, the 4 Scandi markets, France, Belgium and the Netherlands and Poland, Romania, where we'll also launch immediately a tier with advertising. So we feel really good in our position. And one thing is for sure, in most of the international markets, free-to-air is still a very powerful and important platform for the advertisers to reach their consumers.

I'm going to come back to the launches in really 1 second. But I guess, I'm most curious about given the ad strength that you're seeing and maybe potentially different headwinds compared to the U.S., right, and potentially even tailwinds, do you think of managing the cost base very differently, given the linear trends that you're seeing in those markets?

Look, it's no secret that from day one, David, Gunnar and the whole leadership team said we have to -- because also of the debt situation, we have to run our company as efficient as possible. So we did our part. But when I look forward, there are probably 2 different parts in the international sector. One is when it comes to pay TV, let's run it as efficient as possible. And that also could mean that in some of the areas, we take costs out although in the future. But when it comes to our free-to-air markets, then we need to defend that. We need to defend the ratings. It's not only that advertising is up because the market is up. Advertising up because our ratings, our audience performance is up. And to really defend that is so important. Because when it comes to distribution revenues, so the distribution plays, for example, in Latin America, negotiating both linear and streaming gives you flexibility to bring value from linear to streaming in negotiations with the distributors. When it comes to advertising, it will take time. As much as the advertising, the digital advertising on Max is important, it will take time to have the scale. And therefore, we need to really defend this advertising what we have in the international markets.

Okay. So let's go to some of the launches that you started to touch on. And given again what you shared with us in terms of the lower penetration in some of these markets, I guess, the first big question that I have is really, can you help us understand like why it's taken so long to launch in some of these markets from a re-branding perspective? And then almost probably more importantly, how you see the opportunity to capture this whole other market that you haven't been able to tap into, given the lower penetration rates.

Look, the team in the summer of '22, immediately a few months after the merger, the team looked at really at the technology and the product of HBO Max and discovery+, and then made, in my opinion, really wise decision. Let's get technology and product right instead of moving too fast. And the retooling of these platforms, the retooling and really get it right took time and also took significant resources because neither the platform of HBO Max nor of discovery+ was, let me say it very nicely, state-of-the-art. And we are really thrilled where we are with this product. I mean, the ratings on the Apple Store jumped from a meager 3 to 4.9. At the Google Store, at 4.7. And we launched in May last year in the U.S. really seamless. But even in Latin America in February, what is a much more complicated launch because different languages, lot of different currencies, different regulatory rules and thresholds, that really -- and not everybody -- exactly only a minority in Latin America has a credit card, that went so seamless. I was there on both launches in '21, when we launched HBO Max in Latin America, and in February. What a difference. So the product and technology, we got right. There will always be an improvement, no doubt about that. But I think it was the right decision to even take a little bit more time and to get that right. And when we look at EMEA, we have even more languages, a little bit less currency, a bit more languages. When we do same thing, different regulatory machines, but we are very confident that it will be as seamless in these 2 waves in May and in June what we have in Latin America. Now the importance of international. I think you can't be successful in streaming if you're not global. That doesn't mean to be in every single market. And anyway, neither China, Russia, North Korea or Iran, we will be able to do, so but a global presence is important because otherwise, you are really disadvantaged when it comes to monetization compared to your peers. And also, when you want to get the transition right from linear to streaming, yes, it's at a different pace, market by market, region by region, and it's also advanced differently. But when you want to get it right and we, with our strong linear business, want to get it right, you need to have, besides your linear product, also a streaming product. So for us, and I don't think this is an exaggeration, that we say the international markets are of vital importance for the success of our streaming business.

That's very helpful to understand. You mentioned comparing the launches a couple of years ago versus what was happening in Lat Am. I'm curious, any other lessons aside from technology and product? Maybe on marketing or other ways to approach the launches differently this time around?

I think we said it's technology, important. Don't launch if you're not ready. So that's lesson learned #1. Lesson learned #2, I would say, we need a really more robust content offer than when we launched, for example, in Latin America in 2021. HBO is not only one of the most recognized brands in entertainment. It's fantastic and I hope nobody is offended when I say for me, it's the best brand. But that alone and only that and the Warner Bros. feature film, that's not enough. We need more. And this local content which we have in all of the markets, that is really essential to have a much better satisfaction for our consumers, for our subscribers. I think these are the 2 main lessons learned from the last 2 years.

So I guess given that and where we are today, roughly approaching 50 million, getting very close...

46.9 million at the end of Q1.

Thank you. So DTC subscribers are gaining in scale. But I'm curious, given your prior comments about thinking about this from a global perspective, how would you say Max is currently positioned to compete with some of these other larger scale players internationally?

Look, we are at the very early stages. We are in less than 50% of our competitors' addressable markets. Our revenue base, our revenue split between U.S. on the streaming side between U.S. and international is 80-20. You know from the others, it's much more skewed to international. We are not in front of the most important markets, U.K., Germany, Italy, Australia, 2 of them English-speaking. So that all will come. That all will come. As I said before, it's of vital importance that we do that. We are happy where we are but we just started. I think that is the best position what we have. And for the fact that we just started, the 46.9 million subscribers end of quarter 1, that's not a bad number.

Right. So I'm curious, given what we're seeing happen in the U.S. more recently, where we've seen new bundle approaches, and clearly, Disney+, Hulu was part of that with you guys in the U.S. We had some other news yesterday with Brian Roberts announcing a partnership with Peacock and Netflix and Apple TV+. So how should we think about bundling as an opportunity for Max internationally?

I think it's no secret that we are big fans of bundling in the U.S. but also, of course, international simply because it's a better consumer experience. But I wouldn't say -- therefore, yes, we are open for bundling also internationally if all the partners involved, if it makes sense for them. But I wouldn't only focus on the bundling with other streamers. I also would focus with partnerships, what I call bundle with our traditional distribution partners but also with nontraditional distribution partners. Before we launched now in Europe, we had a lot of bundles which we negotiated with our traditional distributors. Canal+ in France is only one of them. It's Telia in the Nordics, it's Allente, it's Altibox, there's many others, too. But we also bundle with nontraditional partners like Nubank. Nubank is the biggest Lat Am fintech. They claim they have something like 100 million clients. And we did a bundle deal with them in Latin America and expect from us really going forward with these partnerships because as I said before, it's a better consumer experience when it is embedded in other products, when it's bundled. But that is besides our D2C offer, our retail offer, the second part of our distribution strategy.

So I think you're also alluding to the fact, in Europe, we've seen a lot of hard bundles, right? And so partnering with telco and...

Exactly. We are partnering with telcos, with video players, with pay TV, with broadband operators, all of that. And sometimes, it's a hard bundle. Sometimes, it's a hard bundle with some packages of them. Sometimes, it's a soft bundle, what is much more of a marketing cooperation. In other -- especially in Asia, we will have also content partnerships. So that is to get really the best product for our consumer, for our streaming subscribers. That's the goal of it.