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

Okay. Thanks for joining us this afternoon. I'm John Hodulik, the telecom and media analyst at UBS. And I'm joined here this afternoon with Gerhard Zeiler, the President of the International Business at Warner Bros. Thanks for being here, Gerhard.

Thank you that you have me.

So we've got about 35 minutes for questions. And if anybody has any questions, I can work them into the conversation by using the iPad and the app here.

Gerhard, why don't we start with sort of just a little bit of background and responsibilities of yourself. How is the international business at Warner Bros. structured and organized, and what are your responsibilities in the organization?

Look, Warner Bros. Discovery is a global company, yes. So roughly 30% of the revenues are coming from outside the U.S. and Canada. Canada is part of the U.S. That's one of the -- that's the only country where it is not in international. And the one thing which we really do very well is we're working as one company. We have no silos in our company. So each of the business segments has an international component and a meaningful component. There are a few business segments like the theatrical, consumer products, games, which are run centrally out the U.S. -- from the U.S., but our guys and the ground are helping to sell, to execute the strategy and to market a lot when it's necessary. And the other business segments, especially when it comes to content sales, especially when it comes to networks and streaming are really working very, very close together. We even have combined [ op sites. ] We only have one team, one team who negotiates the distribution agreements, one team who does the advertising, one team who does the content for streaming and for the networks. One team -- mostly all of marketing is done by one team. So that's more or less the organization and what we are doing on the international front. And the one thing which is really good, we have boots on the ground in almost all the countries, and that helps us a lot.

Got it. One thing you mentioned is the distribution agreements. And Warner Bros. signed a renewal with Comcast. It was announced yesterday. Is there anything you can tell us about that transaction?

Oh yes. First of all, you'll see me with a big smile. And if you would today, see our whole executive leadership from David to Gunnar to Bruce to everyone, they all will have a big smile. We are really happy with this deal.

Especially for you as well because it's the Sky...

Absolutely. So yes, I think Dave Watson said it yesterday, it's a win-win situation for both because we both achieved our operational and strategic goals but it's also a deal or deals, which not a lot of people really expected. And the deals have -- there are 3 aspects. There's the U.S. aspect. Let's start with that. First of all, we got all our deals renewed. We didn't need to give any more carriage flexibility on the linear side. Beyond that, what Comcast already has. When it comes to terms, how do I say that, very careful. We are very excited about that. It's consistent with the terms of the other big deal we did in the last a couple of months, you know the company I'm talking about...

We just had...

And it's on the TNT side, where everybody forecasted that we will lose a lot of money, we didn't. We kept the TNT rate flat. And overall, the rates are going up. So by -- for all the portfolio per subscriber, we will get more year-by-year. So really excited about that. And it speaks, for 2 things. It speaks first, for our portfolio, channel portfolio, and it speaks also for our sports strategy, which a lot of people, as you know, criticized in the last half year. So that's the U.S. still. The second aspect is Sky in the U.K. and Ireland. Look, Sky and Warner Bros. have a more than decade-long relationships, yes. The Warner Bros. and HBO program on Sky, always was great for Sky and for the customers of Sky. I know that, I'm a customer of Sky. Every single year or almost every single year, you get a letter from the CEO, explaining why I have to pay GBP 1 more. And every single time, a huge part of the justification of the programs -- are our programs. So we knew that Sky wanted that program to continue on Sky. And on the other hand, we wanted to launch Max. And I think we both got it. On the one hand, Sky get the continuation of having all this great programming from HBO, the Warner Bros. films, the evergreens, where it's Friends, Big Bang Theory, all the libraries from Warner Bros. in their ecosystem. And on the other hand, we can launch Max early '26. Just a little bit of the background. There are in the U.K., roughly 27 million broadband homes, 20 million SVOD homes. And the Sky ecosystem is roughly 10 million big. So there is a huge amount of growth opportunity for us in going outside the Sky ecosystem. Now we will be bundled, we'll be hard bundled with this roughly -- don't count every single subscriber, roughly 10 million. Subscribers subscribe with our ad-lite product, so with Max, with advertising. And this also gives us a huge opportunity in advertising because it gives us advertising at scale from the first moment on. So the second. But even if I take out and leave them aside, the advertising opportunity, what we have, the opportunity that we can grow with this other 17 million broadband homes even the deal with Sky will grow in terms of revenues year-by-year going forward. So again, we are very happy about that deal, too.

Okay. I didn't see -- I didn't -- from yesterday, being at the conference, I didn't get a chance to read the press release. But so I guess I had -- we had always assumed that when you went direct in the Sky markets, you would lose that relationship. But you've reaffirmed that relationship, you're getting paid more from Sky and you have the opportunity to go after those other 17 million homes.

Exactly. Yes. So we have a balance, of course, a retail subscriber has a higher ARPU than what we get from Sky. But the opportunity is what we have with advertising. The opportunity what we have in terms of [ both ] outside plus that our revenues, which we also get from Sky are growing year-by-year, is a huge win for us. And it's also a win for them because we both achieve our strategic goals.

Right. Makes sense. Okay. Stepping back, maybe we could start with sort of a bigger picture question about the state of the media industry sort of outside the U.S. I mean I certainly take a very U.S.-centric view on sort of all things linear and streaming. But could you talk a little bit about where we are in terms of the transition. And I'm sure not, you can't -- it's very hard to use a broad brush in terms of international markets. But where we are from the in terms of the transition from linear to streaming. How much sort of video consumption you're seeing in these markets? And just how -- and what we're seeing in the U.S. is unfolding elsewhere?

Look, [indiscernible] is -- it's a similar trend in terms of linear is declining, streaming is growing. But there are 3 big buts. Number one, pay-TV always has been, with the exception of very few markets, never as big as in the U.S. So it was never to phrase my boss, David, who said it was never the stuffed turkey outside the U.S. than in the U.S.

It does sound like David.

Only a few markets ever had more than 50% of pay-TV penetration. And therefore, that's not a surprise that the decline is not as steep in the U.S., but it comes from a from a lower plateau, from a lower floor. Second, huge difference. Free-to-air, that's what you call broadcast here, free-to-air is still in the most international markets the dominant -- and still the dominant viewing platform, I'll give a few numbers. Italy, from 100 minutes on video, 79 are watched on free-to-air. Japan, 77%; Germany, 73%; Poland, 55%; Brazil, so that we go also to Latin America, 55%. Even in the U.K., where you believe this is probably one of the bigger streaming and pay-TV market, 46%, yes. So free-to-air is still very, very strong.

Do you know what that number is for the U.S.? It's got to be dramatic...

98% was the last what that I heard and the numbers are told, they are 2023 numbers. So this can change. And of course, it goes down also. And streaming is growing everywhere, yes? I think there's only one in my knowledge, one market where streaming is already bigger in terms of the viewing minutes than free-to-air. That's Mexico. It's 49% to 41% on free-to-air. U.K., it's 46%, yes. So you see that it's not as in the U.S., #1 is clearly -- it's already steaming, #2 pay-TV, #3 [indiscernible] the way, it's another way. And the third really big difference. There is no international. Every single region, every single market is different, especially from viewing habits, but also how the landscape is. And therefore, when you talk about international, you have to talk about market. So if you go a little bit deeper, for example, Latin America. Latin America is probably the closest region to the U.S. Pay-TV is already quite weak. So in an average, roughly 1/4 of the people have pay-TV and subscribed to pay-TV. But in some markets like Brazil it's even way below, yes. Some markets it's higher. But streaming is already very strong also in Latin America. Pay-TV was always quite low there. So good thing for us, we are not in free-to-air in Latin America. We are in pay-TV, have the strongest pay-TV portfolio. But we also are strong already in streaming. I would say, together with Disney, Warner Bros., the 2 are the [ runner ups ] from Netflix in a more or less kind of #2 position. And LatAm is the only region where our streaming revenues were already higher than our network revenues. And the network revenues are quite high. So that's Latin America. Europe is different that I told you about, still free-to-air in every single market, the main platform, the dominant platform. We are -- contrary to LatAm, we have a strong free-to-air business not only our pay-TV channels, also a strong free-to-air business, especially in Poland, especially in the Nordics market, in Italy, but also in Germany and the U.K. that helps us a lot to drive a huge amount of advertising revenues. And as you know, we are not yet in every single market with our streaming product. That will come -- probably we'll talk about it. In Asia, it's the smallest region of us. And therefore, also in terms of networks, in pay-TV, and we are focusing on streaming in the future there.

Yes, in '25. Great. That's a great way to sort of set the landscape. So given the trends in each of these regions, each of these markets and the pace of change you're seeing, what are the key priorities for Warner Bros. in these markets in '25? Maybe -- in '25 and maybe you could look out a little bit maybe over the next sort of 3 to 5 years?

Probably the -- I would name 4, but number 1, 2 and 3 is really rolling out Max globally and growing Max where we already have it. JB Perrette, our Global Head of Streaming, said that I think in one of the conferences a couple of weeks ago, if you look and if we even take out China, Russia and let's, for the moment, also take out India, the addressable -- TAM of addressable households, it's roughly 650 million homes. We are in 350 million. So we have a little bit more than 50%. That's a huge growth engine what we have. But that's not the only one, especially the partnerships we have with distributors and where we bundle mostly with our ad-lite product gives us a huge opportunity about advertising. I mean, I refer back to the Sky deal, 10 million immediately have -- from the first day on, have the opportunity to watch all the Max products with advertising. That's a huge growth engine. Password [indiscernible] is a huge -- the way that we more personalize our product is a huge growth engine. So that's what we want to do. It's very clear, and that's not only for '25 to grow our Max revenues, to grow our Max profitability outside the U.S., to grow the scale of Max is clearly the #1 priority probably for the whole company, but especially for us in the international market. The second priority is that we really want to defend this advertising revenues, which are coming out of the free-to-air markets, Poland, Italy, U.K., Germany, and the Nordic markets because that is a differentiation we have to other regions. And in order to do so, we need to defend also the strength of the product there, get our viewing rate at the same level and also need to invest where it's necessary in a financially viable way. Third priority is really to run our pay-TV channels and our pay-TV networks as efficient as possible. And like in the U.S., we are also very, very profitable in all the international markets with our pay-TV networks. And last but not least, I would name this is not only '25, we already started but also '26, '27, to really grow and expand our local productions. We started with that. We already have a lot of success with that. But going forward, especially from Max, for our streaming product, it's really important that we invest more in that.

Great. So let's dig into -- I know there are a number of sort of aspects there, but maybe let's talk about the expansion of Max and the streaming business internationally. First, yes, it's definitely a huge priority. I mean it's obviously the -- you've got the $1 billion EBITDA growth target out there that you're going to exceed, and a lot of that growth comes from international markets. So you've got a lot on your plate, Gerhard. So can you talk a little bit about just the traction you're seeing thus far from a subscriber standpoint and what you've learned in terms of these new markets thus far into the process?

Look, we -- let's start with Latin America. HBO has a long tradition in Latin America. It was not even owned by Time Warner, more than 50% until, I think, 2019. Only in 2019, 2020 when AT&T took over, the company bought the rest of the shares, which were not owned by Time Warner. But HBO has a huge brand recognition. And that's the reason why we are more or less in every single market with our streaming product. We relaunched it to Max in February this year. As I said before, we are roughly -- together with Disney, if you look at the 2 metrics of subscribers and revenues, roughly #2. And our stream revenues are already bigger than our network revenues. And we are very happy with our profitability already this year there, yes. So that's -- the good news about Latin America Max is also that it's probably the broadest portfolio of what we offer. It's not only, for example, on the feature film side, it's not only the Warner Bros. feature films. We have the NBCU feature films with the exception of Brazil. We have the Sony feature films. We have a lot of series from this, too. And we have a strong kids portfolio with Cartoon Network, with Discovery Kids. And we have local sports, which is which we use for linear and for streaming, and it's very, very helpful in terms of acquisition drivers, but also in terms of engagement, yes. Whenever there is a Champions League game, and we have the Champions League in Brazil, and we have 50% of the Champions League games in Mexico. We have the EPL the English Premier League, in a certain package. We have in Brazil a local Sao Paolo league, which we -- it goes together with the Brazilian league. We have in Argentina, together with, former Fox, now Disney, 50% of the Argentinian first league. We have all the matches of the Chilean [indiscernible] so sports is really big in Latin America. And one thing I can tell you, don't ever estimate the passion and also the fandom of soccer in Latin America, especially in this market. So that helps us a lot. So that's strong. That is in Latin America. In Europe, as you know, we are not yet in every single market. We relaunched from HBO Max to Max in the Nordics, in all the Nordic countries, Sweden, Norway, Denmark and Finland in February. As well as in Spain and in Portugal, and in all the Central Eastern Europe markets in May, we relaunched in June in Poland to Max -- from HBO Max from Max and the Netherlands. And we launched in 2 new markets, in Belgium and in France, this year. And all in all, we significantly increased our subscribers in the last 9 months. So from end of last year to the end of Q3, that's what I'm allowed to say, Q4, I'm not allowed to say. So that's really a huge subscriber. And it's also profitable -- already profitable streaming organization, streaming unit. And In Asia, we are small. We just started. We started in Japan...

Just this year...

We started in Japan. And in the third quarter and the fourth quarter, as you know, it has been announced also in 7 Southeast Asian markets, Hong Kong, Singapore, Thailand, Indonesia, Philippines and Taiwan. And I'm 100% sure, I forgot one of them, which is always the case when I talk about that. So that's our rollout. But as I said before, it's a huge way to go forward. Next year, we definitely will launch in Australia. That's one of our big markets. And we already announced that we will launch in Turkey. And in '26, the 3 big European markets, U.K., Germany and Italy.

And what would that bring you to in terms of -- I think earlier you said that right now you address 350 million out of the 700 million.

650 million, yes.

It will get you to 650 million?

Yes, 350 million out of 650 million. These are the numbers, JB said the last -- I think, last week.

Got it. Okay. And as you look into each one of these markets, and how do you think of the structure of the launch in each market and potential partners? And does that differ with each market you launch into?

Let's go back to what is our goal. We always said very clearly that our goal is to be a top 3 streamer in the first 3 to 5 years, hopefully earlier, in 3 KPIs, a top 3 streamer in terms of scale, a top 3 streamer in terms of engagement and a top 3 streamer in terms of profitability. And that's the guideline. That's the balance we'll have to take when we launch in a market. So all the internal debates we have before we launch in a market is, okay, how do we get the best balance of all these 3 KPIs. And usually, we have a dual strategy. On the one hand, we launch our stand-alone app, yes, our retail offer, our stand-alone retail offer mostly -- not all this, but mostly with an ad-free offer, with an ad-lite offer, with ads and then an ultimate offer. And also, besides that, we are looking at all the distribution landscape and talk with the distributors why it makes sense for them, but also for us to have a wholesale bundle with them, mostly with the ad-lite product because that gives us really immediate scale in terms of advertising opportunities, and it also gives us immediate impact of upscale. So I'll give you one example within France. We launched with CANAL+. That's the big distributor in France. A couple of months, we launched also with Amazon PVC, but we also have our stand-alone product now. In Spain, we have a hard bundle with some of the packages with Vodafone, as we have a hard bundle with Telefonica with premium package plus we have a strong cohort of retail offer. And that's for us in the -- let's say, in the regular market launch, the best direction to really have a balance of scale engagement and profitability. And then there are also markets. I give you one example, Japan, where our brand recognition, both for HBO and for Max never was really there. HBO was never a big issue in Japan. So we had to decide how do we launch this market? Do we go all in, which means you have to spend a huge amount of money into marketing in order to get this brand recognition, and you have to spend a huge amount of money into local content because otherwise, you don't get that. Or you do it more or less in 2 phases. And that's what we decided. We took the best streamer there, U-Next, made an exclusive deal for a couple of years in order really to bring the brand recognition up, and then we can decide how we go forward with that. That will not -- that's not the usual launch. But in some markets, where we don't have the brand recognition, where our body is not so known, especially when it comes to Asia, that could make sense.

So at this point, international ARPU is collectively just about $4 per [ subscriber ]. What's the opportunity? And where can that figure go over time? And how do you get there? Is it a combination of sort of price increases? Does the ad tier play a role? What should we think of sort of monetization?

Let me say first, ARPU is, for sure, a very important KPI, but it's not the only one. Our north star is really customer lifetime value. And really what we get in terms of subscription-related revenues per subscriber includes advertising and distribution. That's really how we see the world going forward. And yes, ARPU is important. When you look at the current ARPU, you have to have in mind 3 things. Number one, we're in a lot of the markets, which are not really known as high-priced markets. Latin America is not known that. Central Eastern Europe is not known that. Most of Asia is not known that. We are not in high-priced markets like Australia, like the U.K. like Italy, like Germany. So automatically, when we launch there, this will help us to grow also the ARPU. Number two, we are pretty sure that our pricing power has not come to a ceiling yet. We tried that out last year in some of the LatAm markets, in some of the European markets, and we didn't really see very negative reaction from -- for our customers. And we will look at that as everyone else does that, too. And third, don't underestimate the value we have in terms of growth opportunities from advertising. We don't have yet -- even in the markets where we have launched MAX, we don't have everywhere a product with advertising. We have it in Latin America. We have it in the Nordics countries. We have it in Poland, in Romania, but we don't have -- we have it in France and Belgium, but we don't have it yet in Spain. We don't have it in Portugal. We don't have it in most of the Central, Eastern European market. We don't have it in Asia. So this will be -- we're just at the start of that, and we will get into that, yes. That's also the reason why we are so happy with the Sky deal in the U.K. So these are all growth factors also for ARPU.

Got you. So you mentioned the company is looking to expand their local content production sort of efforts. What's the correct mix of U.S. content versus local language content? Is it different in each market? And how should we think of that sort of local language content investment as we look out over the next few years?

Look, you need both, on the one hand, the huge important global content when that's the feature films from Warner Bros. or HBO. And I only can name what we have in this next year -- I mean, this year, it was House of the Dragon season 2, it was Penguin, it was Dune, we'll have White Lotus beginning of next year. We'll have The Last of Us. We have Peacemaker. We have a new franchise from It, Welcome to Derry. We have a new franchise from Game of Thrones, Seven Kingdoms. We'll have Euphoria again. In '26, we have another season of House of the Dragon, and then we have Harry Potter. I think everybody of the distributor -- that's one of the reasons why I haven't met one single distributor who I spoke to in the last year, who didn't want Max. So that's the one thing. It's really the global content which you need, but you also need the local content because. And we have already the first examples of that. We have -- these are huge acquisition drivers. For example, House of the Dragon season 2 was this year, the biggest acquisition driver in every single Max market, except Poland, where it was #2. There was the fourth season of The Convict, which was the biggest acquisition drivers, unscripted series. So that's one thing. A lot of #2, #3 position when it comes. We have, for example, in Latin America, we had these last 3 months, we had 2 premiers. One was City of Gold in Brazil, which according to -- the huge film, everybody knows, hugely successful and now even more successful, Like Water for Chocolate, a series, 6-episode series. Every single Sunday when the new episode is out, it's the #1 top viewed program in Latin America, although it's a Mexican series. It's also successful. So you need that, yes. You need it going forward. You need that in terms of scripted series, you need that in terms of documentaries, we had a huge win with some of the true crime documentaries, the Sancho case in Spain. The Murder of Daniella Perez in Brazil. There are a lot of that. And although let's not forget local sports, yes.

Yes. Got it. couple of times I want to address in the last couple of minutes here. First, on the Q3 earnings call, the 2025 EBITDA guidance was increased to now meaningfully exceed $1 billion. How should we think about the international contribution to segment EBITDA in '25 and beyond?

Look, I will not comment on the word meaningful, yes. You have to ask David and Gunnar and maybe JB about that. But what I can say for the international market, Latin America, we are very happy with our profitability. Europe, EMEA is already profitable. And we see a significant opportunity to grow our profitability next year into international markets. That's all what I can say. So I'm not concerned that we will deliver what our guys, what JB and his team and my team together are looking at.

And you expect continued growth from there, right? I mean you're growing in Latin...

Yes. It's not only one, I mean, if you only would grow one year, you know Gunnar, he wouldn't allow that...

Yes. So 2 more. One, since linear is a big part of the international business, I have to -- I need to need one question here on the linear side. What are the trends you're seeing across both distribution and advertising on the linear side?

Look, advertising is interesting because -- especially because of our free-to-air market. End of Q3, the international advertising revenues were higher than the international advertising revenues in the first 3 quarters of '23. And that comes because as I said before, free-to-air is really strong in Europe, and that compensated that. Second, distribution revenues. That's our second biggest revenue driver. There's no secret. I mean, I said that before, linear is declining. And this, of course, has an impact on the distribution revenues. But if you look at only the combined linear and wholesale, I'm not talking about all, linear and wholesale distribution revenues of linear and streaming together, we are growing. So that is from our point, the proof point that we are going in the right direction.

Got it. So wrapping it up here, can you give us a sense for what you're most optimistic about over the next 12 months? And what do you see are the key risks to your business? Both from a linear, and I would say, more importantly, the streaming side over the next 12 months?

Look, I couldn't be more excited about the growth for Max, yes. The deals which just announced, but also launching in Australia next year, launching in the U.K., in Italy and Germany in '26, launching in Turkey next year. All of that I'm really, really excited about that one. What are the risks? I mean, yes, we have to execute well. I mean every single company in an industry, which goes from one business model to the other, we can't afford to make too many execution mistakes. That's clear. But the risk is probably structural. So if the decline of linear is steeper and faster than we thought, yes, that's probably the biggest risk, but there's also a balance with that because then we can even go more and put some streaming opportunities there, and we'll get some revenues additionally on the streaming side. But that's probably the biggest risk of what I see, yes.

Got it. Sounds good. Gerhard, thanks for being here. This was very interesting. Thank you.

Thank you.