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

Thank you, everybody. Welcome to the Warner Bros. Discovery fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing David Zaslav, who is the President and CEO of Warner Bros. Discovery. David has been CEO and President of Discovery since 2006 and has overseen the transformative acquisitions of Scripps Networks in 2018 and WarnerMedia in 2022. My name is Mike Ng, and I cover Warner Bros. Discovery and Media here at Goldman. We have about 35 minutes for today's presentation. Thank you, everybody, for joining us. And thank you, David, for being here. We really appreciate it.

Thanks for having me.

So it's been over 2 years since the WarnerMedia and Discovery merger, and the company has come off a busy first half of the year. Max is undergoing an international rollout. You had some great hits with Dune and Godzilla in the studio. Warner Bros. also recently hosted the Paris Summer Olympics on its European linear and DTC networks. How would you characterize the last couple of years since the merger? And what's your outlook for the year ahead and the years beyond that?

Great. Thank you so much. So it's been about 2.5 years. And we recognized when we were fighting to put these 2 companies together that we had 2 challenges. One is bringing these companies together and building a contemporary asset for future growth; and two, that we were facing a generational disruption. So the last 2 years, we really had a strategic attack plan to restructure the company for the future and for long-term growth. And so over the last 2 years, we fixed our balance sheet. When we got there, we were losing $3 billion in trailing free cash flow. We've paid down $16 billion in debt. And so we fixed our balance sheet, which was critical. So -- and our debt now is long debt at very low interest. And it puts us in a position where we could be patient and strategic now. And we have the ability to make moves if we want to. At the same time, we needed to make the company contemporary and build it up for the future. So we needed to build in a new leadership team. We kept some of the great people that were there and with us, and we brought in some new people. But here we are now, 2.5 years later. And one of our other key initiatives was we needed to make this company global. At Discovery, we were the #1 global media company in the world, and we still are in terms of traditional media. But we needed to build a platform that could support our content, our sport, our news around the world. And so it took 2.5 years, but here we are now. We now have a platform. We launched a little over 4 or 5 months ago finally in -- now in most of Europe and in Latin America. We still have half the world to go. But we're convinced if you're going to build a growth and strategic streaming service, you need to be global. And we needed to get our financial structure in order. But now we see a real path to growth, and it's a 3-part attack plan. One is Max. We have a great product now. And as we go around the world, we have local content, local sport. We put that together with the biggest TV and motion picture library. And we think we have something that's really meaningful. And the market is telling us that we do. Last quarter, we added 4 million subscribers in just 2 months, and that was before the Olympics. This quarter, we said we're going to grow more. We will grow more. We'll grow more than 6 million subscribers this quarter. And so we're starting to scale. And in the second half of the year, you'll see real revenue growth driven by real subscriber growth. And you'll see that from here forward. And it's one of the things that makes us very comfortable with and feel that we're going to exceed the $1 billion in EBIT next year. But we have a real global platform now. The second is our studio. We need to get our studio business back to more compelling profitability. And part of that was we had to build the creative team back. When we got there, we had lost Chris Nolan. And the question was -- and we were down to 4 movies, is this going to be a great creative company? And we haven't lost anybody since then. We've added a tremendous amount of creative talent to the company: Cruise, Paul Thomas Anderson, Clooney is back, M. Night is back. And we also have the best TV production team in the business. But on a trailing basis, we're only making $1.8 billion in our studios business. It was making $3 billion. So our second piece is we got to get that back to $3 billion and growing, and we're making real progress with that. It's a long-cycle business, but Beetlejuice and then The Joker is doing great, and The Joker and a great team, together with a new team at DC, where we just wrapped Superman, and it's in editing now with James Gunn. We think we can really build our motion picture business back with the creative team that we have. And our TV business is strong, Presumed Innocent, Ted Lasso, Abbott Elementary. We have almost 100 of the best shows, and we have a great leadership team there and some of the best talent in the world. So we're driving that business to $3 billion plus. And finally, there's our traditional business, which we really like. We have cable and free-to-air all over the world. And it generates a lot of free cash flow for us, and it's going to continue to. We're going to drive the free cash flow out of that business, and we're going to drive the EBIT. And we've done some creative things with that business. It's news, it's sports and its affinity networks. So we took our affinity networks in the last few months, whether it's food, home, discovery, which is natural history, and we've moved that under Warner Bros. Studio because we're the biggest and best producer of food content in the world. We produce in every language. We're the biggest and largest producer of home content and natural history content. And now as the world transitions, we can look and decide, do we want to put that content on Food Network? Or do we want to put it on HBO and Max? Or do we want to sell it to Apple? What's the best and most economic use of that content? So as I think about where we are now, this is really stage 2. We did a lot of work in the first 2.5 years. And now we're going to fight for growth and we're starting to really see it. And I'm very optimistic that this company will be a fully global media company that will be the best and is the best creative company in the world.

That's a great summary. I'm excited to dive into more. Before we do, I was wondering if you could comment on the news that you put out this morning around the Charter carriage agreement? Anything you could share with us about terms or the structure of that deal?

It's a terrific deal for us. And I think it reinforces something we always knew. We're in the business of free-to-air channels and cable channels. I have been for 35 years. And our job is to create great content that people love and create a package of content so that it really serves consumers and that distributors find real value in it. We have 30 channels here in the U.S. On any given day, between 30% and over 50% of viewing on basic cable in America is us, CNN, Food, TNT, TBS, TLC, Discovery. We are the beating heart of basic cable in America. And we're the beating heart of basic cable in most countries in the world. And basic cable is declining here in the U.S. But it's still a great business. It's a great business for us. And it's a great business for the distributors. They still make a lot of money and it becomes a key packaging element of the distributors. So one, we have -- we provide an enormous amount of value to distributors. Two is that we -- we looked at each of our channels, including TNT. Our job in the sports business, because we're in the sports business almost everywhere in the world, is to make sure we have enough quality sports content to attract a great audience and to provide real value to our distributors. So we added College Football Playoffs, 4 of the 11 games, maybe 5. We added NASCAR. We added hockey. We added tennis, Roland Garros. We added Big East Basketball together with March Madness, the Baseball Playoffs, and this year, the NBA, we hope through the next 11 years, the NBA, depending on how that turns out. But we have a great group of channels. And I think Chris, we really embrace his strategy. I think it's a brilliant strategy, but it also -- it gets us working together again in a compelling way. We did a deal, a portion of the deal was that we get paid for our cable channels, so we held price on TNT. And in the aggregate for our cable business, we got paid more money for our 30 channels. And all of our channels are carried. We didn't -- there were no channels that were dropped. Separately, we did a deal on Max. And for Chris, who really innovated this strategy of being a fully contemporary distributor, he has multichannel, he has broadband, but then he has a package of streaming services. And in talking to Chris, when you put us together, if you're a subscriber to Spectrum, you get the equivalent of $60 worth of streaming services. But more importantly, we're like an anchor tenant in the Spectrum streaming business. They had ESPN+ and Disney+ and Paramount and AMC, and they were quite keen to get the highest-quality subscription service with the largest TV and motion picture library to be part of that because it would almost complete it in many ways. And so if you're a subscriber that's watching TV and you have kids, they can go over to the streaming side of the business if you're a broadband and cable subscriber for Spectrum. And we built into that -- the economics of that are very mutually beneficial to both of us. But there's also an uptake incentive for Charter. And look, we started in this business together. And here we are because of Chris' strategy, working together to rebuild and restabilize the existing business. Why would you leave Charter to go to somewhere else if you have this full bouquet? And Charter will be promoting Max Ad-Free and they'll get paid for that, just like our other players in the market do, like Roku or Amazon. And they'll also be looking to see if there are some people that are Spectrum cable customers that would rather have the Ad-Lite. And so it will become a significant economic revenue stream for Charter. So I think it's -- overall, it's a great deal for Charter. I think it's a great deal for us. And I think it's really good for the industry to stand up for the value that the industry has, which is a great relationship with distributor -- with customers, and they're the biggest broadband players. So we're looking forward to more, doing more things with Charter, and it's an exciting deal for us.

That's great. Thank you for sharing that. I wanted to go back to a theme that you made in your opening remarks, which was about content and storytelling. And Warner Bros. Discovery certainly has a history and a legacy of being amongst the best storytellers in the industry, HBO, Warner Bros. Television, the film studio. Could you expand a little bit about the importance of content and how you're continuing to deliver that?

Sure. Look, at our core, we're just a storytelling company. That's all we are. And there are a lot of other players in this business that are in a lot of other businesses. They might be in retail, they might be in the phone business, in the broadband business and the cable business. Storytelling is the only business that we're in. We do it at CNN, we do it at HBO and Max. We do it at Warner Bros. Television. We do it in our channels. We do it in free-to-air. We do it with our programming around sport. We tell stories. And it gives us a real focus. The history of Warner Bros. is the greatest creative storytelling company in the world. And if we're going to win, that's our product. That's why we thought to bring Tom Cruise back. That's why we thought to hold on to all of the great talent, but we also have a real advantage. We have the best TV and motion picture library. So Beetlejuice was ours. And we developed it and we own everything that relates to it. Harry Potter, when we launch that in '26 for 10 consecutive years, we own it. And a lot of these franchises are franchises that people know everywhere in the world. It's our big advantage, whether it's Superman, Batman, all of DC, Game of Thrones, Beetlejuice, The Joker. We have a great series launching this Thursday, The Penguin. So we have this rich library of stories and we tell new stories. But we can go back and do Lord of the Rings, which we're going to do with Peter Jackson. So we have content that we're -- in every language everywhere in the world. If you say to somebody at 8:00, okay, Batman is starting, Lord of the Rings is starting, they leave before they eat dinner because we have really powerful content. And the good news for us is it's underused. We haven't done a Superman in 14 years. We haven't done Lord of the Rings in a decade. We haven't done Harry Potter in 12 years. So we're excited about where we are. It's a long-cycle business. Getting that $1.8 billion up to $3 billion, we're quite confident. We have real momentum now, but we need to execute on it. And the advantage is the assets that we have and having the best creative people in the world. And as long as we have that, then it's going to stand for a basic principle we have at our company, the best content wins. The best content wins. We think we have the best content. The surveys say we have the highest quality, best content. It's as if we have the best cookie. But we haven't been able to get it on the shelves yet. We might have the best cookie. But if you go to the grocery store and it's not on the shelf, you can't create the value out of it. We're just getting started now. Now that we're available in a lot of Europe and Latin America and within 2 years, we'll be available in most of the world, we're going to be on those shelves. And I think we're going to end -- based on what we're seeing now and how we're growing, this 6-plus million subscribers with real revenue, we're scaling. We're scaling globally.

And to that point, one of the ways that you're getting that content onto that shelf distributed is through Max, right? And as you pointed out, Warner Bros. Discovery is going -- undergoing an international rollout for Max. You rolled out in Lat Am, 22 European countries so far, I believe, with plans to launch in Asia later this year. You talked a little bit about the confidence in the $1 billion profitability target for 2025. Could you talk a little bit more about how you're tracking against these rollout and profitability targets? What are your key priorities for the next couple of years for Max?

To have all the profitability or the majority of it be real revenue growth and real subscriber growth. See how we're growing, see how the economics of our business are growing. That's a key element to this business. And when we launch in a country, we have some real advantages. Not only do we have local content for 20 years and local sport, but we know all the distributors in the market. We've been in business with them for years, and we have an infrastructure and a team that sells local advertising in every market. And so it's a great buffet. And the same thing that Chris is thinking that he wants to be a contemporary compelling distributor. That's the same thing that we're seeing as we go around the world. That -- when we went into France, we did a deal with CANAL+ that said, we don't want to just be a cable and free-to-air player and a broadband player. Could we get Max and do a unique deal to bundle -- hard bundle Max into our broad -- a number of our broadband players, customers? So boom, 1.5 million subscribers, less churn but our product is known. And we're working on those deals around the world. So as you start to see us grow, there will be 3 baskets. It will be us growing by the existing content that we have, the local, the sport and the Max and HBO content. It will be hard bundles with distributors that are finding that they can de-commoditize or grow faster or decline slower by having our great content and offering that to their customers, our subscription-based product, Max. And the final is bundling. And I've been talking about bundling for 2 years. But there's a better word for bundling, better together, better together. Disney and Disney+, Hulu and Max, better together. It's a better consumer experience, more product. It's a very good economic experience. The ARPU for us is compelling because for Disney and us, there's no third party, we get all the money. It's doing really well. It's early. It's been 7, 8 weeks. So we have to see what happens. But I bet the churn's lower. I know the marketing is a lot lower because we're doing it together, better together. And we're seeing, as tough as things are, and it is tough, this disruption is a real challenge, but it's providing real opportunities. If things were going great for consumers and if things were going great for the media players, then we wouldn't be doing these creative deals that we're doing. It's mostly driven by the consumer experience. When you put the TV set on, you have 12 apps and then you're Googling, where is it? Let me get out of that one. It's in this one. How do I search? The best consumer experience always drives significant shareholder value. Better together, bundling is being driven by and will be acceleratingly driven by a better consumer experience. We see it in Brazil. In Brazil, there were 22 million subscribers to cable. It's down to 10 million. Globo is a fantastic company. They have 60% or 70% share and a huge library. But the streaming business is tough. And it's also tough if you're regional. So because it's tough, they came to us and they came to Netflix and said, let's do this together. Better together. That's a great product for consumers in Brazil. We're doing the same thing in Mexico with Televisa, which I've been on the board of for 15 years. They have huge market share in Mexico and great content, great local content. But they look at us and they say, your quality content, your support, our local content, better together. So I think you're going to see all 3 of those playing out. It's -- each of those are providing an acceleration for us. Some of that 6 million plus is growth in this new bundle with Disney. Most of it is international where we have a product in the market that people have been yearning for and quality content. So I'm quite optimistic that we're going to be able to find real growth. And by real, I mean, subscribers and real revenue. And I think in a lot of the markets, we've underpriced. And we still have -- we're still letting too many people use our product. It was very effective for Netflix to clamp down on that, and we'll be doing that over the next several months.

That's great. One other aspect of Max I wanted to hit on was Ad-Lite. Ad-Lite plans represented over 40% of global gross adds for DTC last quarter. The Ad-Lite tier just launched internationally this summer. Could you talk a little bit about the opportunity there? How Ad-Lite factors into pricing for Ad-Free? And how Warner Bros. Discovery experience in linear TV advertising gives you the right to win in DTC advertising?

Well, as I said, the good news is we have local sales teams in every market. So it's -- the incremental cost for us is 0. It's one of the things that makes this business so great in terms of being global is your incremental cost is very little. That's how we built all the shareholder value at Discovery. We took content, and we just moved it around the world. What was the question?

In the -- how is the experience...

Oh, for Ad-Lite?

Yes.

So we have an advertising team in every market. The demand, particularly here in the U.S., is quite strong. In a number of the markets in Europe, it's quite good. In some of the other markets, it's not that great yet. But it allows us to offer a product at a much cheaper price. So if we charge $9 and we're making $7, $8 or $9 in ad revenue, our ARPU is quite strong. So we're almost neutral. If anything, we'd rather an Ad-Lite customer because the bigger the scale of the Ad-Lite, the more economics that we're able to get. And we have incredible data on those that are using our product versus the Nielsen data that we get on a traditional TV. And the demographics are much younger. So there's a tremendous amount of demand. It's also one of the things that we loved about the Charter deal. They added Discovery+ onto their cable users and Max, and together, that will provide a lot more scale for us in order to be able to sell advertising, which is upside. And it gets a good entry point for customers in order to see the great content that we have.

That's great. And I just wanted to clarify a comment you made earlier. You talked about the $1 billion for DTC. Was that EBITDA or EBIT?

Yes. Next year, that's what we've laid out, EBITDA.

EBITDA. Yes. Great. And then just shifting gears to the sports strategy. Earlier this year, Warner Bros. Discovery signed a 5-year deal with ESPN for first round and quarterfinal college football playoff games. You acquired the domestic rights for the French Open, the Mountain West Conference and Big East Basketball. You touched upon this earlier, but I was wondering if you could expand on your sports rights strategy overall and how it's evolved?

Sure. Sports isn't an easy business because it's a rental business, so you have to be disciplined. How much am I going to be willing to pay for that? Historically, we've been able to pay for sport where even if we break even on the sport, we were able to -- if we broke even on a lot of the sport that we put on Eurosport or on the Olympics, when we packaged it together with our 10 to 12 channels and free-to-air channels and went out to advertisers, and we added our ad revenue and our sub fees, the business itself got a lot bigger. And the ability to promote off of sport into our other content was a factor. And so very often, you're buying sport to try and help or elevate another business. That's been the case for us here in the U.S. in terms of cable. Having said that, it's a very dependable audience, and it's an audience that's -- that really wants their content. So the fact that we have hockey to the Stanley Cup this year or March Madness, it -- as opposed to shows where you hope, with The Last of Us or White Lotus, that you're going to get a hit, with sport, there's very little risk that it's not going to deliver within a standard deviation. So we are one of the leaders in sports globally. But we're very focused on being disciplined because we want to make sure that we make money. And it is the one portion of our business that there's times we got to say no to things that we love. We -- and it also -- we should spend a lot of our time on the stuff that we own. If we do a great job with Harry Potter, it's going to be 10 consecutive years on HBO. When we deliver on The Last of Us, it's an asset that we own, and we own -- or Beetlejuice, we own everything around it. We did -- we're going to make a lot of money on Beetlejuice by just all of the retail deals that we did and all the tie-ins and all the merchandising, it all comes to us. And now anything related to Beetlejuice coming out of that belongs to Warner Bros. Discovery. The same is true for the Game of Thrones franchise. So when you build around a great piece of IP, Batman, Superman, Harry Potter, the economics of that can be very dramatic. We have Harry Potter facilities that are generating real profitability in Leavesden, in Japan, here in New York. So it's ours forever. And so we love sport. We think we do it as well or better than anyone, but we're disciplined.

Great. We've seen a lot of consolidation in media across the industry over the last few years, including at Warner Bros. Discovery. Could you talk a little bit about your outlook for further media consolidation across the industry? How does the industry balance the need for managing costs and running the linear businesses for cash flow, while nurturing growth businesses like DTC?

Yes. Look, I'm convinced one of the reasons we fixed our balance sheet, we said a generational disruption, and we aggressively changed this company for the future and paid down all that debt, was it's getting more difficult. When you -- there will be some consolidation. But in the end, I think there'll be much fewer players in the market in this app business. I think there's probably going to be only 5 or 6 players. And I think it's going to be very hard. I've said -- and I believe it's very hard, next to impossible, to have a sustainable growth streaming business if you're not global. You want to have a growing streaming business, you must be global. You've got to be above the globe. If we take Harry Potter out, we could take it out to the U.S. to 330 million people and then try and sell it in every market or we could take it above the globe and reach 3 billion people. There's a reason why the FANG companies have become trillion-dollar businesses. They are great businesses with great products, but they're above the globe. We are now going above the globe. So I think you're going to see a lot of people throwing in the white flag or saying, let's do this differently. Let's do this together. There are some players in regional markets that are saying, maybe I should be part of you. Not just us, there are people coming to us saying, maybe we should be part of you. And I think you're going to see more of that because it makes economic sense and it makes consumer sense. So there'll be consolidation with people buying each other. There will be consolidation of people saying, I've had enough, I'm getting out. And I think you're going to see a lot of consolidation in what -- doing things like we did with -- are doing with Disney. And things like that could be done in Europe too or in Latin America too or across large regions or around the world. If it's a better consumer experience with better economic metrics, we're in an environment now where the content players, all of us, we want to take a hard look at it, and we want to see how we make more money. And we want to make sure, we want to make sure we're one of those 4, 5 or 6 players, global players, that have a seat at that final table. Because if we do, I think we've earned it as a company because I think the best content wins. We have the highest-quality content, the greatest creative team, but also because it will be massive shareholder value creation if we can make that journey.

This has been really great. It's been such a privilege to have you here. I was wondering if you could just tie it all together to us and talk about Warner Bros. Discovery's key priorities and strategic initiatives over the next 2 years and how it ties together to the long-term vision?

Look, I think this is the time for us to really accelerate and drive growth and prove out our strategic attack. Grow Max globally, use our local content, our local sport, and the great TV and motion picture library and creative content that we have. We're differentiated and bring that to market, which we're doing now, and show the real revenue growth and the scalability of that business. Two is get our studio business back to $3 billion plus, and we're going to do it. We can do it. It's our entitlement. We have great content. We have great creative leaders, and we're getting on our way with Beetlejuice and with The Joker and with all the great creatives that we have working back at DC, at Warner and at Warner Television. And finally, fight like hell on our traditional business and don't give up. People said the broadcast business was over in '95. We're going to fight on that business. It's a great free cash flow business. And there's still a lot of people that come home and click those channels. And in some markets, like in Europe, with our free-to-air and cable business, we're growing. Europe is not a business that has built sports in so that the cost of multichannel and free-to-air is so high. So we're growing mid-single, in some cases, double-digit growth in some markets in Europe. So we're realists. We understand that the wind is against us in our traditional business. But we're still creating a lot of great content that can nourish across multiple platforms, and there's a lot of value to create there for what we believe may be a very long period of time. Our job is to get as much value out of that business as we can. Max, global business, top studio maker of television and motion pictures in the world, and get everything we can out of this great free cash flow business to reinvest and drive growth. And you see us doing it. We're investing more in content, even adjusted for the strike this year, and we will next year because that's our product. That's what we are. We're a storytelling company. And in the end, when this is all done, when some people ask me, tell me about what happened at Warner Bros. Discovery. It's going to be -- the question is going to be, what stories did we tell? What stories did we tell? And we have some great stories to tell.

David, this has been a fantastic discussion. Thank you so much for joining us on stage today.

Thank you.

That was great.

Thank you.