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

All right. Let's get started. Hello, everyone. Thank you for joining us this morning. I am Laurent Yoon, I cover U.S. media and telecom at Bernstein. It is my great pleasure to introduce to you the CEO -- President and CEO of Warner Bros. Discovery, David Zaslav. Thank you for making the time to be here this morning.

Thank you, Laurent.

Since Warner Bros. Discovery is a media company, we'd like to do this a little bit differently. We would like to start with a video to show you all the great things that Warner Bros. Discovery has, right? [Presentation]

All right. that's pretty awesome. Yes. So the first time I watched this -- something like this a few years back, I was kind of amazed with the plethora of content that the company has. And obviously, this is not just 1 company. Actually in the past 2 years, the 2 companies have come together, 2 big companies coming together to be even a bigger company. You're managing 2 companies with kind of different focus on the type of content that we're doing, I'm sure very different cultures and different history.

The first I'd like to start off with, what is it -- how has it been, right? Putting the two big companies together with different priorities perhaps in the past. And obviously, you and your management team has been very busy, right? Streamlining the slate, making sure that you capture all the cost efficiencies and that growth and all that. But going back, what is it like to kind of combine the two companies? How do you incentivize your team with a different set of businesses, some growing, some not, you have to make trade-offs across the organization? What has it been like?

Well, it's been a little over 2 years. I think what you're able to see there is just a little of what we do. Warner Bros. Discovery is probably the greatest storytelling company in the world. That's all we do, we're just a storytelling company. But over the last 2 years, we've set on this journey of multiyear plan to transform this company for the future. How do we take all this great content, all these great creatives, and rebuild this company as if we started today in the world that we're living? And we're making a lot of progress, making a lot of progress on our balance sheet. We're making a lot of progress on the creative side. And I think our greatest strength is the diversity of great content that we have. And it's a mantra within the company, our philosophy is the best content wins. And if we have the greatest content, our job is to get it around the world to make sure everyone can see it. And that's been our focus.

Got it. Speaking of content, I think industry overall, especially in the past couple of years, had challenges creating great content. Maybe one of your competitors in particular have talked about how it's been very challenging with this storytelling. Warner Bros. Discovery, actually the [ integral ] brand. I, mean, the company has produced very high-quality content day in, day out. You got Succession. You got Game of Thrones, The Last of Us, Harry Potter, [ DC, but the list goes on ] right? Impressive. You had Barbie last year. It's very consistent. One question that comes up quite often is, how is the your company able to consistently produce high-quality content while some of your competitors have trouble -- have that trouble -- have had that trouble, especially in recent years?

Well first, it starts with the quality of people. Casey Bloys and the whole team at HBO and Max are having an extraordinary run. House of The Dragon is launching next week, The Last of Us, Succession, White Lotus. So it really starts with a great creative team. But we have a big advantage. The company has been around for 100 years. And we have some of these tent-pole IP storytelling content that people know everywhere in the world. So whether it's Superman or Batman or Wonder Woman, our whole DC franchise, that James Gunn is really driving, or whether it's Harry Potter or Lord of the Rings or Game of Thrones, we sit with content. And the good news for us is a lot of it has been underused. So really deploying Harry Potter for 10 consecutive seasons which will launch in '25. Getting back to making movies with Peter Jackson with Lord of the Rings. So one is, I think, great creative people, we've put in a great team at Warner Bros., and taking advantage of the fact that we have certain content. And that may only be 1/3 of what we do. A lot of it is just creating Ted Lasso or Shrinking or Abbott Elementary. But when you look at our company, it isn't just that we have great people. We've hired some of the best people working with Warner Bros. Television. Warner Bros. Television is the biggest and most successful quality maker of television, but we have Bill Lawrence working for us, Chuck Lorre, Mindy Kaling, J.J. Abrams. So I think being the place that people want to come is key to us. And I think the fact that we're just a storytelling company, whether it's on -- in the theaters or whether it's on HBO or whether it's content that we create and sell to Netflix or Apple or Amazon, that's the culture that's really going to have, I believe, going to make us a global winner.

Got it. So I think one thing that we -- that often also comes up is recognizing that Warner Bros. Discovery does have an amazing slate of content and IP -- library of IP that you can leverage. Maybe perhaps one disadvantage that you may have is scale, right? So you have your competitors who may not be producing that high-quality content, but they do have kind of okay-ish content that's introduced. There's something always need to watch. How do you solve that problem? Because you kind of need to have both, right, to make sure that you have custom clients or consumers who want to be on the platform and what really drives that engagement? How do you solve for the [ scale ] part of that equation?

Well, scale is very important. And as we look at our business, the first thing we needed to do on our Max HBO product was we build the actual product itself, build an algorithm. But right now, we're primarily U.S. We have 100 million homes. But this is a real catalyst opportunity for us. The DNA of our company is international. When I was at Discovery, I got there, we were 3 channels, we grew it to about 14. But then we launched channels everywhere in the world. And then we launched sports around the world. And so we're in -- we're in 185 countries. We're in every language, we have content that we produce or sports that we have in every country. And it's been very effective for us as a company. We're the #1 global company in the world. But we hadn't launched Max globally. If you look at -- and a lot of these services that are -- that have bigger scale than us, 2/3 of their subscribers come from outside the U.S. So in the last month, we launched in Latin America, and we just launched in Europe. The big kickoff will be we have the Olympics in Europe, that you get all of the Olympics. The only place to get all the Olympics will be Max, and then our product will roll out. And so I think the next 12 to 14 -- 12 to 24 months for us is going to be very exciting because we got our product right, we have, I think, a really unique advantage in that we have local content in local language with libraries, we have the breadth of HBO and Max, we have local sport. And we're bringing all of that now to Latin America and to Europe. And it's exciting because I think it gives us a chance to really scale. In our models, we expect that at least 2/3 of our subscribers over the next several years as we grow will come from outside the U.S. So we still think that there's growth left in the U.S., but the U.S. is relatively mature. We can still grow subs, we can still grow ARPU. But the real growth engine for us is to be global. And when I look at media companies, I think it's very difficult to be a U.S.-only company. The real success of Discovery was that we were global. And I think this next step for us. We're fully global on linear and free-to-air. Having a real service that people can access on all devices, it's going to be -- will be a big advantage to us and I think a big growth engine for us.

Got it. So by having more subscribers, we saw them the U.S. to your point, a mature market. Having more subscribers outside the U.S. market will drive perhaps not more engagement on a per subscriber basis, but the total engagement across the globe will increase. Where does bundling come into that picture, right? Obviously, it's been a topic since the earnings and the announcement, the bundling with Disney. There's a lot of optimism around that what it may look like and what it may do for both of your platforms, right? How does that help drive overall engagement and subscription growth going forward?

Well, I've said -- I've been talking about bundling for the last 2 years. But the real focus of our company in terms of driving this transformation and this multiyear plan has been that this is a generational disruption. The disruption is not as much around content. People are watching more content than they ever have, and quality content is more important, I think, than it ever has been. But the way that they receive it, the distribution method, whether they get it on their device, whether they get it from one app, the -- it's -- right now, it's a really challenging environment for consumers. So if you hear about a show or you hear about sport, you've got to Google it. Where is it? What platform is it on? And so the consumer experience is challenged. We've gotten used to it. But over time, I'm convinced and we're convinced that, that experience will get better. And we need to drive it to a better consumer experience which will get us better economics and a better product. So one, we think bundling provides a better consumer experience. And we have two initiatives that we'll be rolling out in the next month or in the next 3 months. One is our sports venture which will roll out this fall, which is Disney, FOX and us. It's a very contemporary product. It's an app. So if you want to see hockey, you could see all the playoffs in one in place. You can see all the baseball in one place. It's a different approach. We think it will be very attractive and it would be a better consumer experience, a real contemporary consumer experience. The Disney bundle is another example where we think it should provide, first and foremost, a better consumer experience. You get Hulu, Disney+ and Max. And if it works, and Disney and we are really going to drive it here in the U.S., it should reduce churn. Two of us will be marketing one product. And it -- and because we're doing it directly, the ARPU could be quite compelling for us. So I think it's the beginning of this transition from people going to 10 different apps. Eventually, I think there's going to be 4 or 5. And we're convinced, with the best content, the best quality content in the world and making more global content than anyone else, it will be one of those. And as the bundling happens or as the consolidation around the world happens, I think that the economics around the business will get better and better.

Got it. So I'd like to peel the onion a little bit on both the sports venture and your partnership with Disney. So on the sports venture, just based on what's on the press, if I think about how FOX, you partnered with FOX [ they've been thinking about that, what they've expressed ] is the opportunity to reach consumers who may not have a sports package today through the traditional pay TV offers. On the other hand, maybe Disney on the other hand, maybe their perspective is not so much about the incremental opportunity, but just making sure that there's different tiers of products that are available in different price points. I think relative to those two companies, I think your company has been, I wouldn't say silent, but less vocal about the potential benefits of it. Where do you stand? Do you think this is more about how FOX is thinking about it in terms of incremental subscribers, right, reaching customers who may not have a package today? Or is this more about how Disney is thinking about it, as then having all the different tiers available for customers with different budgets for these packages?

In the end, the consumers are going to decide what they love and what they're willing to pay for and where they feel [ nervous ] to want to spend on. I'm excited about this because I think it's a great product. And this whole idea of what channel is this sport on goes away. It's all there for you. And so -- and that experience is as good as we think it's going to be, and we'll listen to the consumer and build on that. And I think it could be a very big business for us. And it's critical for us to work to create products that are contemporary. To your point, we have a business called Bleacher Report and House of Highlights, between 30 million and 40 million people a month in common. It's a sports product. But 80%, it's very young, below 30 is the average demo. And about 80% of those that are on Bleacher and House of Highlights are not signing up for cable. And yet, they're very interested in the content that we have. So by building these bundles, by creating a sports product, I think we're creating a great invitation for the next generation to come on to a contemporary, exciting new product and see the sports that they love. And we'll learn a lot from it.

So moving on to that Disney+, Max bundle. You mentioned something interesting on how you describe the product. So you mentioned today, there are different prices to Go. You have content in one place, you could come and experience it. Does it imply that [indiscernible] you want to release just I'm getting two different products at a discounted price, but I still need to open, let's say, two different apps to get to the product or the content. Or are you talking about combining the viewing experience with something perhaps down the line in terms of experience?

Well, for the bundle really to be effective, it needs to be that, when you go there, you can move across the full program offering. So my grandkids might be watching a Disney+ movie, but then when they're finished, they would want to watch Harry Potter. And then at night, you might want to watch Succession. And so the seamlessness of it is important, and that's what would drive about it...

Okay. It's a seamless experience across the platform. Okay. So at the upfront a couple of weeks ago, and I went to every single one of them. And in every single one of them, there is a funny comedian who would kind of talk about -- making fun of the bundle, right? The basic cable coming back and et cetera. Maybe to some degree, that may be true. But how would, but how -- do you envision the streaming bundle in terms of the consumer experience to be different? Or is this like, over time, something that we've seen with the pay TV offering in the past?

Well first, one of the issues with the streaming services is that the churn is too high. People are coming in and then moving from product to product. And so one of the things that's really challenging the long-term economic and economic growth is churn and scale. We're addressing the issue of scale by launching globally and really attacking the globe with what we think is very compelling content in language with teams on the ground, try and build the scale that should really drive the economics both in terms -- and drive the subscribers and prove out that Max is a very compelling growth business. But separate from that is the issue of churn. And by bundling together, that will be -- we have found that, if we bundled together with other content, that more people in the family like. On a very basic level, the more often you watch a product, the more people in the family that watch the product, the lower the churn. And as we talk to consumers, one of the biggest issues, though, is finding the content that they like. And so when you do bundle, if you're bundling with the right players, I think Disney, the idea of Warner Bros. Discovery and Disney together, it's a very compelling offering. We think that will provide a more nourishing and better consumer experience. The other thing that started to happen, which is -- which makes us really optimistic in terms of a new vein of growth is, as we're launching outside the U.S., a number of the traditional distributors that were broadband and cable or broadband and mobile, their overall philosophy was they were in the broadband business and they're in the multichannel for the home business. And the whole idea of the channel store was Roku or Apple or Amazon. What we've started to see now, particularly in Europe, is the idea that those distributors, we're having discussions with them now about they don't want the younger consumer or the younger consumer in the family to leave their multichannel environment or leave their company. And so we're doing deals now that's hard-bundling Max with distributors. So for instance, Canal Plus. We're on their platform as a traditional multichannel provider with multiple channels in free-to-air. They have broadband. But then everybody that gets their broadband gets Max. We did a similar deal with Telefonica. And those -- because they're hard-bundled, you're picking up significant subscribers, whether it's 1 million or 2 million incremental subscribers. In some cases, It's less, in some cases, it could be more. Gaining those subscribers provide real economic value, the ARPU was quite compelling. You don't have the churn. We're still in France and we're still in Spain now that we're going to be promoting directly to consumers. But if you're a customer of Telefonica, we're getting paid on every one of those. It feels a little bit like the old model, sturdy, low churn, and you don't need to spend as much in marketing because of that. So as we launch outside the U.S., it's bundling. One is we think our product is the right product at the right time. And we -- this is who we are and what we do. We're on the ground in every country, in every language. But bundling with other providers that have great content that complement ours, together with this idea of hard-bundling with distributors that are looking to have a bigger play in this new world and who want to have a content environment on their broadband is a potential real growth opportunity for us.

So after watching the video, perhaps I got a little too excited and jumped right into the questions. There's a sort of overarching question that I forgot to address, and I want to address it now so that we don't miss it. So one quick context here for those of you who already know that David has been around in the industry for a long time. He started as an attorney in the industry, was a senior executive at NBC Universal. Which is not part of Comcast, where I used to work at. And he became the CEO of Discovery. And of course, now, he's the CEO of Warner Bros. Discovery, the combined entity. So I'd like to say we have an adult in room.

Sometimes.

And I have an overarching question in the industry. So the question is about industry disruption in general. And again, one context for some of the generalists here, is that the media industry has already gone through many disruptions over the past centaury, right? And obviously, the Water Bros. Discovery has been around over the past century, it's been around for a long time. Not you, but the company has been around for a century. And it has gone through multiple transitions, right? You went from print to video, went from black and white to color, went from TV broadcasting to pay TV. In every one of these, whenever that happened, there was a pretty significant disruption in the industry, right? And obviously, Warner Bros. Discovery has outlived it, and here we are. This one that we're going through now, the disruption through streaming feels a little different. It seems perhaps because we're living through it now, it seems pretty quick, right? And it is also being kind of driven by large companies, very well capitalized. And especially initially, they didn't really care about the unit economics for making money from the business, it made -- it was really challenging for the core media companies to compete. So given that, what is happening now, two-part question here. The first part is how do you compete, right? How do you stay young as an organization to continue to compete against these companies that are throwing billions and billions of dollars, right? And perhaps not, I don't want to say careless, but maybe don't care as much about the unit economics of those businesses. How do you compete long run?

Well, I think we stay true to who we are. We're a pure storytelling company. And as long as we're making the best content and we're attracting the best creative talent in the world, and when we tell a story, it's a story that you want at the home and you want to put the TV set on or you want to go into the theater and watch, we're going to be a very healthy company. And in terms of that box, we're the biggest producer of quality television. You look at the quality content we're producing at HBO and Max. And so over the last 2-plus years since we took over, really had two focuses. One, we recognized very early on that this is a generational disruption, and so we need to restructure this company for the future. Talking a look at each business. What does this business look like if we were going to start it today? What do we need? What content is working for us? What isn't? And so we were quite aggressive over the last 2 years. When we took the company over on a trailing basis, it was losing $3 billion. Max itself was losing $2.5 billion. So one was, we need to get this business healthy and restructured for the future. What does this business look like so that we have the best chance of succeeding? And here we are 2.5 years in. Last year, we had over $6 billion in free cash flow. Part of being healthy is having a healthy balance sheet. So we've paid down over $15 billion in debt. We look at our capital structure now as a real asset. We went into the market last week and did a tender where we bought back -- we had $2.6 billion and we were able to buy back $3.4 billion in debt because our debt is so low in terms of interest rate that we were -- that it's really an asset for us. So one was, how do we get this company looking toward the future? And we've built a great team and we have a long-term plan. It's going to take time. We have a long-term plan for D.C. We're -- now this idea of taking Max globally, we've been working on it for over 2 years. We're finally going to be driving Max around the world. But I think one piece of it is to really get in there early and recognize that things aren't going to be the same. And the second is we need to have the best creative content in the world. We need the best creatives with us. So we've been fighting, as we've been restructuring the company, to get the best creative people with us. Ryan Coogler is back at Warner Bros. Tom Cruise is back at Warner Bros. Clooney. Paul Thomas Anderson. So we have great creative people. We want the best creative people with us. But disruption is not new. When I started at NBC, I was part of the team that launched CNBC. But at that time, it was a huge disruption. We'll -- it will be just the broadcast and it will be a real business. And we were so unsure that it would be a business that Jack Welch felt like we can't do this ourselves. So we partnered with Chuck Dolan and we launched AMC, Bravo, IFC, CNBC, MSNBC, News12 Long Island, sports channels. 4 years in, they were all losing money, but we had to fight and will them to success and then we had to scale them up. It's not that different. And during that time, a lot of people felt it's not going to make the turn. I feel that same way now about where we are. We have got Max profitable. We have a great bouquet of content. We've learned a lot about what works and what doesn't. And as we take this around the world, I think we have a real opportunity. Because in order to be successful in this business -- we've been committed to global in our traditional business. But in order to really be successful, we need to be global, and this is a good moment for us.

So speaking of the need to be global, and also -- actually, I would like to touch on the global part a little later. But the history of linear, the transition over to pay TV and now the transition over to SVOD and the disruption that has caused that we're witnessing now, it has caused so much disruption that one may describe the industry as a set of special situation companies, right? And the question is -- obviously, the migration to streaming will continue. However, the linear market is still, especially in the advertising market, still, the vast majority of video advertising still on linear. So it has to coexist going forward. So if we were -- so this is not so much about Warner Bros. Discovery question, but more industry level question around, if we roll the tape let's say 3 to 5 years, what would that look like? What would that coexistence look like? And do you think will eventually lead to some kind of a temporary equilibrium?

Well, I think there's likely going to be some consolidation. There are a lot of players. There are a lot of players that are losing a lot of money. One of the reasons why we really thought to drive our free cash flow and pay down our debt is to be in a position, as we roll out globally, as we fight to build our business, that we're a healthy company. And over the next 2 to 3 years, I expect that there's going to be some opportunities. There will be some players that want to get out of the business. There will be others that will look to consolidate their streaming businesses with others. And so I think we will look to be opportunistic during that time. And so I think, over time, there will probably be fewer players. I expect that there'll be 4 or 5 global streaming players that will -- that if we were here 3 or 4 years from now. I think in order to be, as I said, to be successful, I believe you need to be global. If we create Harry Potter content, the ability to put that in every language everywhere in the world, that is scale, and that's formidable. And so I think that the global nature of this business is going to be -- is going to require a number of players to decide whether they want to go it alone. And our job has been to really focus on the fact that we're stable and strong and to roll out around the world, and then to focus on others in an opportunistic way that can maybe help us along the way, whether it's through bundling like Disney; whether it's through bundling with FOX and Disney; or whether it's hard-bundling with distributors; or whether, over the long term, some of the smaller players in streaming will end up wanting to be part of a bigger global organization.

So maybe pushing the envelope up a little bit, I'd like to give it a try. So you mentioned there's likely to be consolidation, fewer players down the line, you're getting your balance sheet healthier. Are you suggesting that potentially down the line at some point, you may be looking to do an interesting acquisition?

Well, consolidation could happen in a lot of different ways. In some markets in Europe, the consolidation is almost like a Hulu consolidation. The companies are staying separate, but instead of 3 or 4 people create -- 3 or 4 companies creating streaming services, they're coming together to create 1 that has a broader breadth of local content. I do think that some companies will be for sale. We're going to be very disciplined. I really like the content, the broad content that we have. We feel that we're in a good position right now, and we can be opportunistic, but we're going to be very disciplined.