Warner Bros. Discovery, Inc. (NASDAQ:WBD) Goldman Sachs Communacopia & Technology Conference September 6, 2023 5:25 PM ET

Company Participants

David Zaslav - President & Chief Executive Officer

Conference Call Participants

Brett Feldman - Goldman Sachs

Operator

Good afternoon. I'd just like to remind everybody that today's presentation may include forward-looking statements regarding the company's future business prospects, plans and financial information. The company's actual results could differ materially from those stated or implied due to risks and uncertainties associated with our business. For additional information, please see the company's filings with the U.S. Securities and Exchange Commission and the Investor Relations page of our website for our complete safe harbor statement.

Brett Feldman

All right. Thank you for that. Thanks to everybody. We're going to get started here with our next session. It's a real joy to welcome back to our Communacopia + Technology Conference that's what we're calling it now. David Zaslav, the President and CEO of Warner Brothers Discovery. David, thank you so much for being here.

David Zaslav

Good to be here, Brett.

Question-and-Answer Session

Q - Brett Feldman

I actually wanted to call it Cannacopia this year, but apparently, it was a copyright thing that we couldn't do. So let's jump into some of the most recent news. So earlier this week you updated your 2023 guidance, which now assumes financial impacts from the writers and actors strikes will persist through the year.

So you trimmed your EBITDA outlook to account for $300 million to $500 million of impacts, you actually raised your outlook for cash flow to at least $5 billion. Assuming these strikes are indeed resolved by year-end, how should investors think about the impact from Warner Brothers going forward, for example, in 2024, and how long is it going to take to resume normal film and TV production?

David Zaslav

Great, thank you. Good to see everyone. First, before we talk about the strike, because we talk about it in terms of economics, it's really about people and writers and actors that have been out for a very long period of time. And we're a content company, we're a storytelling company. We need to do everything we can to get people back to work, but more importantly, it's true of creative people, but it's true for all of us. People need to be compensated fairly and they need to feel valued. And I was in LA the last two days and we really have to focus as an industry and we are on trying to get this resolved in a way that's really fair and everyone feels fairly treated.

Having said that in our guidance, we said that this would be resolved by September. And here we are in September and this is really a very unusual event to have the last time it happened was 1960. And so what we did is we just said we're going to really fight to try and get this resolved sooner, but the impact of it for the rest of this year. And it could - if it happened sooner it could get diminished, but that there would be significant increase in free cash flow and a reduction of 300 to 500 in EBIT.

On the free cash flow side, instead of $1.7 billion, which is what we had guided to, it will be meaningfully more than 1.7.

Brett Feldman

For the third quarter?

David Zaslav

For the third quarter. And we had said, it would be $4.5 billion to $5 billion of free cash flow for year and it will be meaningfully more than the 5. And so that's it, that was really all that was and we're just hopeful as a company and I'm very hopeful that we can get that resolved.

And if we can get it resolved soon, then the longer-term impacts will be minimized. But there is real industry challenges here. We haven't fully recovered from COVID, and particularly on the motion picture side. And so we've put off some movies, we put off doing and some other movies and so we're very focused on how do we get this industry, this great industry back.

Brett Feldman

And how quickly do you think you could get back to a normal slate of production around your TV shows and films if you were indeed back to work very early next year?

David Zaslav

Well, very quickly. We're ready and raring. So as soon as these strikes are resolved, everybody is ready to get back to work, also in particular to just activate.

Brett Feldman

All right. I want to go to the second recent news item which is the programming dispute that has emerged between Disney and Charter. So as everyone here knows anyone who's a spectrum customer is not able to see any Disney channels, most notably ESPN. In framing the dispute, Charter signaled that the video ecosystem is broken and that the model they have proposed for Disney is the model they're going to propose with all of their programmers going forward. How do you think about the relationship that you have with the pay-TV providers? How do you see it evolving and what do you think is the right win win here?

David Zaslav

Well first, I don't know that much in particular about that dispute. But it feels like this is a moment. It's not clear whether this is a moment that gets resolved very quickly. And we're back to having an industry that's in secular decline and it's anybody's guess of how long that takes or whether this is a more meaningful moment. But we've been - we closed on this company a little over 16 months ago. And we have been on a relentless operating mission about this company to reinvent this company for the future.

To structure it and as we sat down, what does each business look like, so it's best equipped and best structured to - for the world we live in today. And here we are 16 months later. We have a company that's generating over $5 billion in free cash flow. We had max, which we needed to launch a new platform which we did, it’s robust, it could take live news, live sports and if we’re making money, it was losing significant money.

And we've restructured each of our businesses and we have real command and control of each of those businesses. All of that work was to put ourselves in a position where we were ready for a moment just like this. And so it's hard to figure out exactly how this - what direction this takes. But to be at a company now where our balance sheet is delivering, where we have real command and control of our assets, we have a good sense of the IP that we have and we're on our way with our direct-to-consumer business. I think we have a lot of weapons and a lot of optionality in order to take advantage of this and build sustainable growth out of it.

Our focus is sustainable growth. And at the same time this feels that it's disruptive and it may be - it may resolve it not be disruptive at all or it may be very disruptive but coming out of that from our perspective is opportunity. This industry is being disrupted and that's why we have been aggressive and relentless about and making a lot of difficult decisions in order to restructure this company for the future, where we're spending money in the right way where we are generating real value out of all of our investments.

And so we are looking at how do we use this. There's a lot that needs to happen with this industry and more conflict, more challenge is all around one thing there's disruption. And how do we create an environment that's better for consumers? People spending time on linear, a lot of time and I still believe in linear. People over 40 are spending most of their time still with linear television, but there's lots of consumption. We need to have content everywhere and we need to create an ecosystem that works for everyone.

Brett Feldman

Well, let's talk about one of the things that you're doing to improve the experience for consumers which is you launched Max. You rolled it out in the U.S. in May, you're going to start doing your international rollouts beginning in the fourth quarter with Latin America. How has this service performed in the U.S. so far versus your expectations like what's working as planned and maybe where you’re fine tuning?

David Zaslav

The platform is really terrific. It's able to support all of our entertainment and non-fiction content. It's a platform that will roll out next year and later this year around the world. The engagement on the platform is up more than 20% of what people are consuming on the content is - content that was on discovery, home, food, crime. And so the idea of a broader menu of content seems to be working. We need to work through the transition of getting people on Max and that's worked really quite well and now we got to focus on how do we grow it.

In the next two to three weeks, we'll launch CNN Max, which I think is a big moment. CNN is the most recognizable brand in news around the world. It's a strong linear asset, but we'll be launching a new live news product, so when you're on Max not only you in your own world will you might be watching White Lotus or Succession or fix or upper. But you could also tune to live news and if something happened -- is happening in the world, you'll see it, so the lead the product is alive.

And then we'll add sports. We said that we will put sports on Max and in the near-term, we'll get to you with more detail, but this is one of the strengths of this company. Leader in news, leader in entertainment where we own all of our IP and leader in sports domestically and around the world where we have a lot of great content. And all of that we could bring to bear, and we just need to figure out exactly how to offer it to create value for the consumer and sustainable growth for shareholders.

Brett Feldman

Stick with news for a minute. That is an area of content that really hasn't been embraced yet on streaming. Why do you think that this is a right time that Max is a right platform and how's this going to be different than what was briefly tried through CNN+?

David Zaslav

Well, first, CNN Max will be primarily a live product, live news. So when people see CNN, the first thing they want to know is what is going on in the world. Max is demographic, is about 30 years younger than linear television. And so there's a whole different group of people that are on Max. And there are a lot of people that are on Max that don't have linear television.

So creating a 24-hour news product that's geared more toward that generation, a younger generation is, I think, it's compelling, when you - we might have 70 million homes right now on linear in the U.S. and now you add to that all the subscribers that we have for Max that we could reach.

And in addition to that we had a great hire last week in Mark Thompson. I met Mark about 20 years ago when I at -- when he was at the BBC and I was at Discovery and we’re doing things like Planet Earth together. He’s a superb executive, but he not only did he run the BBC, but he also turned around the New York Times by running their digital business. So we have CNN Proper, a global linear asset, but how do we take CNN news and make it a product long-term for the future on every platform.

One is to get it on Max, and Mark and the team will be figuring out exactly how to build that over the next couple of months and years to make it really compelling. But we're also the number one digital site for news in the world. In any given month, we have about 150 million people that come to us.

And one of the things that Mark is going to focus on is how do you take that huge funnel together with Bleacher Report and House of Highlights, a huge funnel of another 100 million or 150 million younger people with sports news together with all the other content we have food and figure out how do we take CNN on linear, how do we take CNN on SVOD and then how do we take CNN Digital as a brand and build that whether it's subscription, whether some of it is just a funnel, but how do we build that and we have a terrific executive that will be leading that and figuring out how to make that happen. And I can't wait to see what Mark and that team is going to do, because it is an extraordinary asset for us. It's the leading news organization in the world and I think Mark is just the right guy at the right time.

Brett Feldman

I believe that once CNN is included, you're not necessarily going to raise the price, so you're essentially making the product better for the existing Max consumers. We've seen a lot of price increases across the streaming landscape, you raised the price of Max when you launched it, you of course, put a lot more into Max at the launch. How is your pricing strategy evolving? And how are you thinking about driving growth in your streaming business through price versus volume?

David Zaslav

Well, the first thing that our first focus was how do we transition HBO Max into Max and have a product that's loved with people spend more time more people in the family are on Max. How do we transition it sort of do no harm. We have almost 100 million homes with 95-plus million homes, which is a lot of scale on a big advantage in the marketplace. And we have an asset that's making money domestically and our whole business will make money this year. And so that piece of it is a very big deal for us to get started with.

Brett Feldman

And how does advertising factor into the ARPU strategy in your DTC segment?

David Zaslav

Well, the great thing about digital advertising in general is on cable we get paid for people 25 to 54. The audience is for a lot of our cable channels, whether it's Discovery, HG, Food, sometimes 50%, 60%, 70%, 75% of our audience is over 54. So we're only getting paid on a smaller piece of our audience. It's still quite a good business. But on Digital, we have much better data and we get paid on every subscriber and the CPM is higher. And so we're generating a lot of value in the ad-light product. We were one of the first companies to say that ad-light is going to be critical to the future of the direct consumer business.

And it's turned out to be even more valuable because as you scale these businesses up and that's one of our main objectives here is to scale with ad-light. The data gets better and as the scale gets better, the economics get better. And so the ability to generate $6, $7, $8, $9 per subscriber with less advertising because you get paid on all of them.

And so, for instance if your CPM is $40 on cable and you're able to get $60 on digital, but you're getting paid on every single person that views it. So it's quite compelling. And it's one of the reasons I think you've seen a lot of people move into that market.

Brett Feldman

And what do you think is going to be the right mix over time as you scale the ad product alongside the ad-free product. Are you assuming it’s going to be about 50:50, or are you targeting something else?

David Zaslav

The consumer - what we're trying to figure out now is how do we offer our content in a way that nourishes consumers and makes it easy for them. And so ultimately, the consumer is going to decide. We do have a marketplace that is a bit challenged and it's one of the reasons why you look at the marketplace and you see a lot of players in the market losing a lot of money. We have 15, 16, 20 apps that offer content. If you're a consumer, imagine, 10 years ago, you're watching TV and you're watching Discovery and you want to watch ESPN, you got to download another app and put it in a verification. And then you want to watch a show. You have to Google where that show is and then go and put that.

In the long-term, it's not a great consumer experience. Consumers have adapted to it. But in the long-term, I've been a big advocate for bundling. This is the idea that you bundle together. Cable base, basic cable was a bundle, and is a bundle and it was quite a good and nourishing experience for consumers. Whereas downloading all these different apps, as we talked to consumers, they find it difficult.

And so I think one of the things that that we're going to see as we look into the future is bundling and some of this disruption and some of these moments of what's going to happen may activate a quicker, a quicker transition to things like some of us in the content business bundling together as a way to create more value and create a better consumer experience. So sometimes this disruption intention creates more value and we have worked really hard to put ourselves in a position where knowing that this tension is going to come. How do we get, how do we use this as a moment of opportunity with all the diverse assets that we have.

Brett Feldman

We've heard people talk a lot about this. Are there real conversations going on behind the scenes about actually doing it?

David Zaslav

There is. And it's much more so in the last few months than it was in the last few years. So it's because the marketplace -- we did an experiment that started two weeks ago when we put all of AMC's best content on HBO Max for the next 60 days. So that was Kristen Dolan and JB getting together and saying why don't we try this? Let's see how it goes works on HBO Max. Let's see whether when it transitions whether that helps you grow your AMC direct to consumer product. There are there are a lot of products in the market. And the sustainability of losing billions of dollars, and in some cases losing billions of dollars and lowering price. As you talked about price, price has significantly come down in the last few years for premium content. And the investment in premium content has gone up. And if you talk to consumers they're getting better content. They're spending a lot less. But it's a lot more cumbersome defined. We think that there's meaningful opportunity, as we add quality content to Max and as we launch it around the world to move on price. We think that the value that we're creating and the amount of value we're creating that we can get more price. When we have risen price, we haven't found any. You know we found it almost the loss to us has been very minimal.

Brett Feldman

As we were talking about earlier you're putting CNN into Max at the current price point. You're also intending to put sports into the product. Is that something you would also think about putting in at the same price? Or you think about that being something that can be more of an ARPU tool along the lines of what you were just talking about.

David Zaslav

We have a very comprehensive strategic attack plan on sport. With TNT in the U.S. we have great sport with the NBA and the NHL and March Madness baseball playoff starting in October. And so we've been hard at work. And in the next few weeks we'll lay out a plan. But we think it's a big advantage to us to have sport together with live sport. Live news together with our bouquet of entertainment, non-fiction, library and movies.

Brett Feldman

And is that true on both linear, engineering platforms and both domestically and internationally or does it vary?

David Zaslav

Well we've been experimenting with sport and news outside the U.S. for some time. We put news on our platform in Poland where we are the leading provider of news. And we found that it reduced churn and we actually found that we were able to grow. So that gave us some encouragement and was helpful in our decision to put CNN Max on Max. Sports is -- we've offered it different ways. In the U.K. where us and Sky are the leader in sport. We have BT Euro Sport. And we offer that as in many cases as an add-on.

And in Europe that's mostly the way that it's offered. I mean one of the challenges that the industry is facing is the U.S. is different than most markets. And almost every in every market in Europe you can get multi-channel to the home for $10, $20, $30. And then if you want sport you opt for it. Some of the tension in the market is that the price of sport has gone up significantly. And the cost to consumers have gone up as it's been as every consumers had to pay for it. You've seen with regional sports over the last few years and particularly in the last year and a half that tension has really erupted and a lot of distributors have said I'll do without it. And this is the first situation when there's real tension around a broad national sports platform. And we'll see how that plays out and the impact that it has on the market place.

Brett Feldman

Are you expecting that a sport is likely to end up being more alacarte [Ph] in the U.S. or you just not sure at this point?

David Zaslav

It's hard to tell. I don’t -- our stuff is we're in news, non-fiction, entertainment, and sport. And our content is in the aggregate reasonably priced. We've redone a number of deals including deals recently where we've been very effective. And I think we've created deals that have value for both parties and we've got meaningful increases. The cost of our overall content is perceived as reasonable. We still produce a lot of content and we've increased our investment in production for food, HG because non-fiction we can produce content now. And when you look at our overall package of news and sport, I think it works very well. And on any given night we're between 25% and 40% to 50% of viewership on cable with all of our channels. And I think the view is that we provide real value and we're really investing in it. So we'll have to see.

Brett Feldman

It's not clearly about your film's business, so we've seen broadly speaking…

David Zaslav

Just one more point. However, this transpires at least for us when it comes to our to Turner, our sports assets. We don't have any deals coming up or any of that. We'll be facing this issue of where the industry goes and what the preferences are for consumers and distributors and content owners in 25. And so we're on the side lines of this. I think we're one of the good actors in the industry that's produced spending a lot of money, still in linear because we believe in it. And I think we're good value and in 25 we'll see where this is.

Brett Feldman

Just as a follow-up on that, the NBA contract obviously is coming up sooner than 25. Just how are you approaching sports contract renewals in general? What boxes do they need to check to be relationships you want to stick with?

David Zaslav

Well, the good news is the sports that we have in the U.S. we do very well with. So and our deals go long. So we have we have March Madness into the 30s. We have hockey into the 30s. We have baseball through 28. And the deal that's coming up is the NBA through 25. But those deals are attractive to us. We're doing well with those deals. We have rights. We have the rights to put it on linear. We also have all those sports rights for no incremental fee to put on digital, which is what makes the business itself really as cable has declined. The ability to recapture audience on digital with no incremental course of sports rights is quite attractive.

And so our current position is very strong. We like the NBA a lot. Inside the NBA is probably the best sports program we think on television. Our shoulder programming does really well in social media and in ratings. We've been talking to Adam. We also have Bleacher and House of Highlights. And we have a big international platform. So I think the relationship has been quite strong. We'll see where we're beginning to have that discussion. Now I'd like to hold on to the NBA. But we've spent a lot of focus. We're focusing this company for the future. And one of the key elements of having a sustainable growth company is to have free cash flow. That’s the real health of a company is how much money are you making. We'll be generating over $5 billion in free cash flow. We will be below four times levered at the end of this year. And we will be between two and a half and three times levered on a gross basis by the end of next year. This will be a company that will have a strong balance sheet. Real cash, this is a real company with real creative talent and we own all of our IP.

And so that is our focus. And in order to buy any piece of IT, we're not going to sacrifice the health of the company. What's most important to us is that we have a great balance sheet. We have optionality that we own our content. And we own our content in a way that we think we can make money. It's not going to make sense to do a deal for anything and jeopardize the economic trend we have at this company in order to own another piece of IP.

Brett Feldman

I'm going to come back to the balance sheet in a few moments, but I want to come back to film. So if just generally across the industry, we've seen some of the longer tenured franchises have a little bit more mixed success at the box office this summer. But Barbie has been just an absolute phenomenal film. What did you get right with Barbie? And how do you think about the ability to replicate those learning’s in your film slate going forward?

David Zaslav

Well first, the Greta Gerwig gets the most credit. She's an extraordinary genius and she worked very effectively. I think with the best creative team in the business. I'm biased, Warner Brothers motion picture team right down to the wire to make that the best product possible. But we were able to do something that I don't think any other company can do. We have ten to twelve channels in every country. And when we said, we're going to run this as one company, we meant it. Every division of this company got behind Barbie.

Shaq and Barclay and Ernie were talking about Barbie. If you went to Sweden and you were watching a football match at halftime, the field turned pink and you saw Barbie. Every asset that we had was turned pink, talking about the strength of Barbie. We had shown on HG, every cake on food network for a month was pink. Anywhere you went, you saw it. And this is the power of Warner Brothers. If we see a piece of IP that we really believe in and we operate as one company. And a lot of that is at no cost. We could be promoting on all of our platforms everywhere in the world at those were our platforms. We're one of the top marketing companies because we have channels everywhere in the world. And so when we get something we believe in, we can really drive it. We did the same thing with House of the Dragon. We did it with the last of us. And so I think that's one of the strengths of us as one company, all of our creatives meeting together every week.

But one of the other real strengths of Warner Brothers is we talk about the great IP that Warner Brothers owns. But for us, the challenge is that our content, our great IP, Harry Potter, DC, Lord of the Rings. That content has been underused. We haven't done long-form Superman in over 10 years. We haven't done anything with Harry Potter for more than a decade. We haven't done anything with Lord of the Rings. And so one of the big differentiators of this company is that we own content that in any language anywhere in the world. You say Batman and people look Batman 8 o'clock and you look at your watch. I got to go. And we need to generate that. And we got to be careful not to overuse the content.

But now we want, we think there's a lot of shareholder value in attacking a 10-year DC real plan around DC. Bringing Harry Potter back to HBO for 10 consecutive years, doing multiple movies, Lord of the Rings. If you look at the performance over the last 20 years of Warner Brothers, when you take those franchises out, Warner Brothers, it's relatively flat. When you put those franchises in, it's the best performing studio in the world. We need to deploy our best capital. And we need to do it with the best creative people in the world. And when people see what we did with Barbie and what we're doing with HBO, which is the only platform that like must-see TV, aggregate audiences, every Sunday night. And people come together, not just to see the content, but then it explodes on Twitter.

So Musk is calling me going, what do we do with this? Everyone's on Twitter talking about White Lotus. It's about a shared experience. We get it in the theater, we get it on HBO, and talent wants great writers, directors, actors. They want their content to be seen. They want to have a chance to have an impact on the culture. They want to have a chance to have an impact on how people see themselves and see the world. And that's what we get to do in this business, but only if we do it together. And we're very proud of Barbie. But the motion picture business, Barbie, HBO, it gives us a great hand in attracting, in getting Warner back to what it was. This was the place that all the great talent wanted to be. And who wouldn't want to be with this great company, where you could be on. We could take you around the world. We could put you on Sunday night on, on Monday night on HBO. If you do a movie, we could put you on right after Euphoria. And we could deliver an audience. It seems old-fashioned, but it's not. People still want to watch content together. And they want to feel that their content was valued and seen.

Brett Feldman

I want to talk a bit about advertising. This is one of the areas that comes up a lot in our conversations with investors. Because they look at the linear business and they say we've got the secular, dynamic of core cutting that is creating some structural pressure. We obviously have the cyclical issues that we've been dealing with. How do you feel about the company's position for, for eventual, how it's positioned for eventual recovery and TV advertising? And then longer-term, what's your strategy for ensuring that is more of that added inventory moves to the streaming world that is going to be resurfacing on your platforms?

David Zaslav

Well look, the advertising market has been tough. We saw a little improvement last quarter. I think you'll see a little improvement this quarter. But not a lot. For the first time, we get a sense that the sentiment is changing. This real discussion at companies and at agencies about fourth quarter, being a moment that things are going to begin to turn around. We got our fingers crossed. We haven't seen it yet. But there is a feeling that the sentiment is changing. We had a very good upfront. We were able to move a lot of our inventory. We did very well. In particular, our digital inventory on HPO on Max and some of our digital inventory has gotten very big increases. We were still able to get increases, low single, but increases on number of our better known channels, like HG and food and discovery.

And we took a little bit of a reduction in some of our others. But if the market comes back, we're really well positioned to take advantage of it. And our ratings are doing very well. The fact that a lot of people are out of the market right now, we're doubling down.

If you watch HG, Food, ID, Discovery, a lot of those networks are actually up year-over-year. We were lagging the industry for a period of time. And now for the last three months, we're starting to really accelerate where we're doing much better than the industry. And so we're producing a lot more content there. And we're producing a lot more content internationally where we can and we started to pick up some share.

So I think we're well positioned. We need to grow Max; I mean we need to grow Max ad-light. HBO's been around for 50 years. And this idea of a shared experience, 20, 30, 35 over a period of time, 40 million people watched the last of us, House of the Dragon. And we get big audiences on Sunday night. And so the and no one's been able to advertise inside of an HBO show. Just simply putting a 60-second spot in front of White Lotus is it's generating a tremendous amount of economic value and a lot of excitement. And so what we need to do is get that bigger. So we could take advantage of that.

And we started to move into the AVOD space because we have the largest TV and motion picture library. And getting it out there to monetize, particularly the content that's not being consumed on SVOD is something we're getting started with and you'll see us move more aggressively. And all of that should give us more help on the advertising side. But on the international side things are a little bit better.

So we're seeing a little bit of a better improvement on the international side on advertising than we are domestically. But the trend is slowly better. The hope is that it gets a lot better soon.

Brett Feldman

All right, squeezing one last question here. Assuming you do meet those financial targets that you've set particularly your balance sheet targets for the end of the next year. How are you going to evolve your capital allocation priorities and where does M&A fit in?

David Zaslav

Well, as we've laid out our objective is to be between two and a half and three times levered on a gross basis by the end of the next year. But we'll have real money next year. And the first thing we're going to look at is how do we invest in this great business? We have a broadly diversified business, gaming we’re the largest maker of content in the world. We've got our motion picture business, which hasn't performed well over the last couple of years. So we got some real work to do. And when we have a balance sheet where we can invest in ourselves, we have a balance sheet that we could take out and purchase things that we need. I don't think we need other big assets, but I think the opportunity to look at IP and also the opportunity to have a balance sheet where we could buy things if we feel that we need them will make us really unusual in a, in a, in a crowded media space where free cash flow and real growth is hard to find.

Brett Feldman

David, that's a great place to stop. Thank you so much for being here.