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

Okay. Great. We'll get started. We're thrilled to welcome Gunnar Wiedenfels back, currently the CFO of Warner Bros. Discovery, but on to other things as well. So we will get to all of that.

Let's focus a little bit on Warner Media and Discovery first, but it's been 3 years since the merger, and you spent a great deal of that time restructuring, transforming, realigning the company across every single division. You've accomplished a great deal. However, as you've done that, the industry continued to evolve and change. So you've announced plans to split the company into Warner Bros. and Discovery Global, where you will be the CEO. What is the time line of the split?

Yes. Look, first of all, welcome everyone, and thank you, Jessica, for having me again. We have publicly said Q2 of next year is when we want to get this split done. And I will start by saying that we're seeing great momentum on all fronts right now. And that is for the separation process, that is for the business fundamentals and financially. So maybe allow me a minute or so to talk about those 3 separately. So from a separation perspective, again, I continue to see a very significant value creation opportunity here. We are well on track. We have that Q2 '26 time line. The timing is perfect in a way. We have done so much hard work since that merger to delever the company. We're at net debt of roughly $30 billion at this point. We will be significantly lower than that at the end of the year. So that's been one key priority in the past. The tender offer was a great success that has helped us. And we've got one more creative tool in the box here with the retained stake for Discovery Global in the Warner Bros. Company, and I'm sure we're going to talk about that. But that's something I'm starting to focus on a little more now. We have about a year after separation to monetize that, but it's already -- we already have serious people asking about ways to get their hands on that maybe before that. So there's a lot of interesting activity there. And we had a very busy weekend. We substantively completed our intercompany agreements that we need to put in place, TSA's commercial agreements. And we got that broadly done over the weekend which was a huge milestone and the team worked really hard through that entire weekend. And you saw the announcement that we hired Brad Singer, who is going to be David's CFO for the new company. We worked with him for a month or so as he sort of did diligence on all the numbers and plans, et cetera. He's tremendously experienced and is going to add a lot of value and is excited to come on. In fact, he's already soft starting so that in October -- on October 1, he's going to hit the ground running. So that's all going very well. Fundamentally, a great momentum also across the board, creative success right now, maybe more visible than anywhere else in the film business. We're now at 6 for 6 film openings, above $40 million. I'm not going to jinx it, but I'm also positive about the upcoming Conjuring installment. So that's all going very well. On the network side, we have the unique situation right now of no major affiliate deals upcoming for a while. So the team is really also focused on the creative side, but also Luis Silberwasser are making a lot of progress putting together a streaming solution for the new Discovery Global company in the sports space. Mark Thompson is going to come out with more specifics within a matter of weeks on a CNN streaming solution, et cetera. So great momentum there as well. And financially, we're continuing to generate the cash that we need in a major way. And I have full confidence in our guidance elements, the at least $2.4 billion for the studio, streaming at least $1.3 billion for the year and then a positive outlook from there. So we've chopped a lot of wood. We still have a lot on the agenda, but we're checking it off one by one.

So maybe just a follow-up on what you just mentioned, the up to 20% stake in Warner Bros. Going to Discovery Global. So it sounds like you can entertain bids before the split or you are entertaining bids before the split is complete. Can you talk -- like is there -- can you sell it now before you split? And also, can you -- you've mentioned that you've already had discussions. What kind of interest has there been?

Well, we could. And if you take a step back, it's going to be a trade-off, right? Because we want to get full value for it. It's a huge building block in this whole transaction to get an equity injection at the right valuation at an accretive multiple to help with the delevering path. So that's definitely going to be a priority. But -- and again, we've been very clear from a tax perspective, we have a year, potentially a little longer, but let's say, a year. But we have had some interest in discussions earlier than that. And technically, we will be able to monetize part of it, all of it, whatever before we even close the transaction. Again, there's nothing specific here yet, but definitely something that I'm going to be a lot more focused on over the next few months.

What's the process to establish opening leverage for each company?

Yes. So one of the big building blocks from here to the closing of the transaction in the second quarter is getting pro forma financials in place and carve-out financials. So the team is working really hard on that. There is a sequence of steps that we need to get through on that basis. And as part of that with an eye towards the budget for next year and updated long-range plans for both companies, we're going to work with the Board to make the final determination of what goes where. We've already said and that hasn't changed. If you look at the takeout financing for the bridge loan, the $17 billion bridge loan that we have in place, the majority of that is going to go to Discovery Global. And if you add the existing debt, so the vast majority of the debt is going to be with Discovery Global, where the free cash flow is to service that debt as well.

Okay. So let's go through the pieces. Let's start with the studio, which is obviously one of the crown jewels in all of Hollywood. And it still appears to us at least effectively that there's a significant opportunity in terms of profitability. You guys have targeted $3 billion in EBITDA potential and not as an endpoint. Can you break down the drivers that get us from here to at least there?

Yes. And I'm glad you said it in your question already. It's not an endpoint. It's an interim step. I think there's significantly higher potential there. And the changes in that business take a while. And we've been working really hard over the past 3 years of -- on implementing that change. And it really starts with the creative, both on the executive side and in the talent community. David has made a real point of bringing talent back to working with us. And I think we're seeing some of the benefits now in our performance. But it also expands into just the professional management, the process of decision-making from a budget through marketing, through production execution to windowing. And then third, embracing franchises, the 360-degree nature of the monetization opportunity. So those are some overarching points. And we have already seen some steps forward here, again, $2.4 billion at least for this year is a significant step towards that goal. And from here, there will be further growth opportunities. On the film side, again, it's always hit and miss, but there's a little bit of a pattern now. And the slate structure across the 4 distinct categories of films and everybody staying in their lanes and doing what they are best at is going to be a driver for us. In Channing's business, the Warner Bros. TV production, I'm sure we're going to talk more about it, but we're seeing great success, especially in the growing SVOD space where she's in business with all of the key platforms. Games has had more difficult years last year and to some extent this year, but there is tremendous opportunity. We know where that business can perform and JB has restructured the business into 4 franchises that have $1 billion-plus potentials, and we're going to see some of that come through. So there's opportunity in every one of these units.

Gunnar, you've said that in success, there is no greater upside, but in failure, there is less risk. Why is that the case?

Well, it comes back to a strategic and professional approach to managing the studio, right? It starts with the slate composition. As I said, we're going to have a what we think is going to be the right balance of tent-pole films with some lighter budget films. The right mix of using our own IP, but also embracing the creative genius of original film makers. But it has to be -- it has to fit and dovetail together in the right mix of a slate. The operating discipline and rigor is a major point. When we first started working together, there wasn't a lot of detailed budget focus, discipline, daily hot cost reports. And I mean we're actually coming in below budget for all of our productions now on average. That's something that was unheard of before. And then, frankly, just professionally looking at the data, analyzing how to best make those windowing decisions, what goes on to what platform and embracing, again, all cash registers that help us monetize our content. Those are all important factors. And again, it is a hit-driven business. We will make great movies. The past 6 films that we released all had 90 audience scores. It's probably not going to continue on like that forever, but that's a factor as well. So we have a great run right now, but I believe that what we have put in place in terms of how we manage the studio is also going to limit the downside in the inevitable cases where we have some creative failures.

So I mean, you have a ton of franchises, but just a few months ago, you released Superman, which successfully kickstarted the DC Studios launch, and it's obviously very important to the company. How meaningful can the halo effect be on the rest of your business? And how does it flow through?

It's tremendously important. I think DC is maybe one of the most undervalued and underappreciated parts of our portfolio. And I think the DC franchise has billions of dollars of greater potential than what we're seeing right now. And again, back to the point that I made in the very beginning, it all takes time. It was 3 years ago that James Gunn and Peter Safran defined their vision, laid out that 5, 10-year canon. And Superman on the film side was really the kick off of that. But it's more than just the films. We're going to have a film cadence from here on out, but you've also had The Penguin. You have Peacemaker's second season right now, tremendously successful on HBO Max. And it's all integrated. It all fits together. And I think that is going to create opportunities beyond the individual titles. I'm super excited about DC.

Right. Do you expect content spending to be structurally lower now as the entire industry is focusing more on profitability?

Look, it's true. The entire industry is focused more on profitability. And I think that's good because it will drive sustainability in this industry. Where does that matter for us? It's Channing's WB TV production business. And what we're seeing here is that it's actually helpful because with greater budget pressures everywhere in the industry, people are focusing on quality, and that's what always takes them to Warner Bros. TV. Channing is in business with all of the leading streaming platforms. In fact, is producing some of the biggest hits on those platforms. We just recently announced a couple of green lights with Amazon. So she's very, very well positioned, and we haven't even started expanding into some other areas where she still also has a right to win.

I mean, we can stay on Warner Bros. -- I mean the studio forever, but let's move on to streaming because we have a lot to cover. The profitability in at HBO Max has been a source of outperformance from an EBITDA perspective. Can you talk about the building blocks from here and what the long-term margin potential of the business is? Can it be a 20% plus margin business? And if yes, what -- under what time frame?

Yes. We made that -- we set out this 20% bogey a while back, I still believe that it's very, very achievable. At the same time, margin isn't an objective in and of itself for that kind of business or growing that kind of business, right? The way we manage it is much more focused on looking at customer lifetime value relative to the subscriber acquisition cost. And one of the reasons why I wouldn't want to put a timestamp against this is there may be investment opportunities to drive towards greater value that may have a short-term margin impact. But we have -- look, we have invested billions and billions of dollars in the technology platform in the global launches and rolling that platform out everywhere around the globe and the content that we need to drive through that global platform. And I expect very significant operational gearing from here with a lot of the incremental revenues dropping down to the bottom line or allowing us to further invest in more of that successful content. Again, we've been very, very open to driving content investments because I do think we have a process that works and that allows us to drive great ROI with limited downside potential.

There's been a significant increase in pricing just across all of the streaming business. Are we approaching a tipping point from a consumer perspective? And has the increase in prices driven downgrades to the advertising tier?

So look, I think -- first of all, of course, you're right, there is a trend towards higher price. We just had Apple increase the price of TV+ pretty significantly. And look, I think it's healthy. We're coming off of a period where enormous amounts of quality content were given away below value. And so I think that trend has been pretty consistent, and I expect will continue to persist. In terms of how that drives viewers to one tier or the other, I'm not sure that pricing is the most important driver. And frankly, we want to be indifferent, right? If you have a greater tolerance or even an interest in advertising, wonderful, take our ad-light tier. If you want sort of the uninterrupted experience with no ads, pick that product. And ideally, we adjust pricing between the options in a way that gets us profitability on both fronts. For us specifically, there is significant opportunity on the advertising side. In many of the international markets, we have only recently introduced ad-light tiers, and also in the U.S., I think there is greater engagement, greater scale, maturing technology that's going to make this one of the growth drivers for the mid- to long-term plans.

On the other side of that, HBO Max has been leaning also into wholesale agreements that drive subscribers, but obviously lower ARPUs. Why is that the right approach?

It's the right approach as one approach in a mix of approaches, right? It all comes back to we want to drive shareholder value. We want to drive customer lifetime value and make sure that we are acquiring profitable subscribers. So wholesale partnerships are one way to very quickly build scale, especially in new markets. And it's typically a financial profile whereby we have lower subscriber acquisition costs, sometimes lower churn initially, but you pay a price for that with lower ARPUs. But it's definitely one legitimate way to grow. And then over time, as you're more established in certain markets, you might shift that, the weight between the various go-to-market approaches. But we've always been very open. We want to be as widely distributed as possible. Wholesale partnerships are part of it. We also like our Disney partnership. That's been a great success here in the U.S. and has tremendously attractive economics. So all of these approaches play a role in the mix, and it's always falling short to just look at, this is the number of subscribers or this is the ARPU. None of these metrics matter in isolation.

Right. So in the first half of '26, you're going to have some pretty big launches, U.K., Italy, Germany. What are the milestones investors should focus on?

Well, for the U.K. and Ireland markets, we're essentially locked and loaded. I think we've always said publicly that we're expecting 10 million subscribers through the Sky relationship, the Sky partnership, but it's also important that we have flexibility beyond that, other partnerships and then a retail go-to-market approach. Germany and Italy are other key markets that we're -- as we speak, working through the approach to cover those markets. But there's big opportunity. Those are some of the most relevant markets in Europe, and we have the benefit of our content having been known and sort of iconic in those markets for years already. So we're going to hit a fertile ground there.

There's a view that DTC consolidation needs to happen. What role does WBD play in these discussions?

I'll give you the same answer for this as always. We'll be looking at everything, Jessica. And in fact, one of the reasons why we are splitting the company is that we are going to create 2 entities that are going to be much more nimble and able to respond to opportunities in the market. That said, we're also very focused on creating 2 very viable companies. And I think that HBO Max has what it takes. We've got a great process in place, a great platform. What Casey is producing is working really well. But that said, we're always going to look at whatever opportunity arises.

Right. Do you believe you may need -- let me say that, do you think you'll need to accelerate content investments to further drive engagement on the platform? Were you like a steady cadence at this point? And do you have to expand?

Look, it's a growth business. And as such, we have increased the content spend in our plans. And by the way, that applies to both HBO Max and the studio. And again, as I said, I have great confidence given the process that we have put in place that we're able to deploy capital in a very accretive way in both of these businesses. That said, and David has made this clear from the very beginning for us, for HBO, it's much more about quality than quantity and that's going to continue to be the focus of our content strategy. But yes, we are going to continue spending more.

So last thing on DTC. But when you put all this together, as we think about the growth algorithm for streaming, how do -- how should we think about subscriber growth versus ARPU growth over the next few years?