The operator welcomes participants to the Warner Bros. Discovery Third Quarter 2023 Earnings Conference Call and introduces the speakers. Andrew Slabin, Executive Vice President, Global Investor Strategy, reminds listeners that the call is being recorded and introduces the other speakers. He also mentions that the call will include forward-looking statements and refers listeners to the company's filings for more information. David Zaslav, President and CEO, then greets everyone and thanks them for joining the call.

Warner Bros. Discovery is hopeful for a resolution to the SAG-AFTRA strike and has made a final offer that includes a high wage increase. They recognize the challenges facing the industry and have been focused on reinventing their company to be more stable and generate more cash flow. They have been able to pay down debt and are now in a position to invest in growth opportunities. Their diverse assets make them well-equipped to drive long-term value.

Warner Bros. Discovery is home to many iconic brands and franchises and recognizes the potential for growth and value in underused IP. They plan to bring in a new global head of franchise and work closely with leaders to expand their reach and impact. As a company that owns and controls all of their content and storytelling IP, they have the advantage of maximizing distribution for profitability. Their top priority is their streaming service Max, which has shown positive EBITDA and growth in both distribution and advertising revenue. The addition of live programming has led to increased engagement and lower churn.

In the third quarter, the subscriber numbers were impacted by a light original content schedule and a decline in Discovery Plus subscribers. However, the company is excited about their robust content slate for 2024 and beyond, including new seasons of popular shows and the launch of CNN Max, a 24/7 streaming offering with live news and original programming. The company is confident that this new content will further fuel Max's popularity and appeal to a younger audience. They are continuously analyzing and improving the offering, but the key takeaway is that they were able to pivot quickly and seize an opportunity.

CNN is expanding its audience and impact by providing CNN Max on its service. The network has over 70 journalists on the ground in conflict areas, bringing their expertise and reporting skills to provide comprehensive coverage. The new Chairman and CEO, Mark Thompson, has visited all offices and CNN is coming off a strong month with increased viewership and digital platform success. They have also launched Sports on Max, offering over 300 live sporting events annually, in addition to their existing programming. This combination of live sports and news, along with their strong entertainment and media library, gives CNN a competitive advantage.

Discovery is expanding its sports and news offerings on its streaming service, Max, which has already gained millions of subscribers. The service will also be launching in new markets, including Latin America and Europe, and will be the exclusive home for the Olympics in Paris next summer. With only 45% of the world's broadband households currently reached, there is still significant growth potential for Discovery. Additionally, Discovery's gaming division, with 11 studios, provides a unique advantage as younger generations increasingly prioritize gaming over other forms of entertainment.

Warner Bros. is a successful developer and publisher in the gaming industry, with a strong track record and consistent profitability. They have released top-selling games, such as Hogwarts Legacy, and have a strong portfolio of popular franchises like Harry Potter, Game of Thrones, DC, and Mortal Kombat. They have a high ROI and comparable operating margins to leading gaming companies. They plan to continue investing in their gaming business to drive growth.

The focus of Warner Bros. Discovery is on transforming their biggest franchises to include more always-on gameplay and live services, with the goal of driving engagement and monetization. They have put specific capabilities in place and see significant opportunity for post-purchase revenue. Despite external challenges, such as the economy and the strike, the company is confident in their strong assets and creative team. Gunnar Wiedenfels, who will discuss the financials, is pleased with the company's progress and their ability to navigate obstacles. They are operating with increased precision, focus, flexibility, and adaptability.

In the third quarter, the company repaid $2.4 billion of debt and plans to continue reducing debt as they generate cash. The company's financial profile has improved since the beginning of the year. The studio segment saw a 3% increase in revenue, driven by the success of the movie Barbie and the release of Mortal Kombat 1. However, TV revenues declined due to strikes and tough comparisons against previous licensing deals. Networks' revenue and EBITDA were impacted by a decline in distribution revenue and a challenging advertising marketplace in the U.S. compared to more stable international markets.

In the fourth quarter, the company is expecting an improvement in their network segment ad sales due to strong deals secured for the upfront year and improving ratings on core networks. The D2C segment saw a modest sequential loss in subscribers due to a light content slate and expected decline in overlapping subscribers. However, revenues increased 5% due to growth in subscriber-related revenues and advertising, while content decreased 17%. D2C Adjusted EBITDA was positive $111 million, a significant improvement from the previous year. The company is now on track to break even or even be profitable in the D2C segment, which is a valuable asset for long-term growth. Overall, consolidated revenues increased 1% and adjusted EBITDA increased 22%.

The adjusted EBITDA has improved by $1.2 billion year-to-date, but Networks advertising revenue is down and the ongoing work stoppage in Hollywood is a headwind. The company expects adjusted EBITDA for the full year to be in the range of $10.5 billion to $11 billion, with factors like the scatter market, feature film releases, and content licensing impacting the final number. Free cash flow for the quarter was positive and has improved significantly compared to the prior year, mostly due to transformation efforts and cost synergies. The company expects free cash flow for the full year to be similar to the previous 12 months. Looking ahead to 2024, the company is in the early stages of realizing the full benefit of its initiatives and has some preliminary thoughts on budgeting.

The company remains confident in their ability to maintain cost discipline and drive growth through cost synergies and strategic investments. However, there may be challenges in the future, particularly with sluggish advertising trends, which could impact profitability. The company will continue to use a disciplined framework to guide their decision-making and focus on long-term profitability targets.

The company is uncertain about the impact of the work stoppage on their TV production business in 2024. They hope to reach their target leverage range by the end of 2024, but it is unlikely without a significant recovery in the TV ad market. They anticipate generating significant free cash flow in 2024, but there may be potential headwinds such as a decline in U.S. advertising and a return to normal content capital spending. However, they are confident in their leverage and deleveraging plan, as their debt stack is long-dated and low-cost.

The company has made significant progress in reducing its debt, with the majority of remaining debt being fixed and the potential for further debt reduction at a discount. The company is well-positioned to compete and respond to industry changes, with a focus on driving sustainable and profitable growth. The company has also made improvements in its financial profile, including reducing debt and improving profitability. In the third quarter, studios revenues increased by 3%.

In the third quarter, Warner Bros. saw a significant increase in revenue thanks to the success of the movie Barbie and the release of Mortal Kombat 1. However, TV revenues declined due to production and delivery delays caused by strikes. Networks also experienced a decline in revenue and EBITDA due to a challenging advertising market, particularly in the US. However, they expect to see improvement in the fourth quarter with the help of strong upfront deals and improving ratings. In the D2C segment, there was a slight decrease in subscribers due to a lack of content and a decline in overlapping subscribers from Discovery and Max. Revenues increased thanks to growth in subscriber-related revenues and advertising, but were offset by a decrease in content revenue. Distribution growth was driven by price increases and a more favorable subscriber mix.

In the third quarter, D2C Adjusted EBITDA for Warner Bros. Discovery was positive $111 million, a significant improvement from the previous year. Consolidated revenues increased by 1% and adjusted EBITDA increased by 22%. Year-to-date, adjusted EBITDA has improved by nearly $1.2 billion. The company expects adjusted EBITDA for the full year to be in the range of $10.5 billion to $11 billion. Free cash flow for the quarter was positive $2.1 billion, a significant improvement from the previous year. The improvement is mainly attributed to the company's transformation efforts and focus on efficiencies.

The company has identified additional cost synergies and is working on improving working capital and capital allocation. Free cash flow is expected to be similar to the previous year, with plans for further cost discipline and investment in sustainable profitable growth in the future, including increased marketing support for Max and new market launches.

The company's disciplined framework will guide their process and support growth, but there are challenges ahead such as sluggish advertising trends and uncertainty in the TV production business. They are confident in their momentum and reducing leverage, but it is unlikely they will reach their target leverage range by the end of 2024 without a recovery in the TV ad market. They expect to generate significant free cash flow.

The key building blocks for achieving strong free cash flow in 2024 include a decrease in cash costs, lower interest expenses, and improvements in working capital. However, there may be potential headwinds, such as a decline in U.S. advertising and a return to normal content spending. The company's debt maturity schedule is manageable and the organization has made significant progress in adapting to industry changes. The focus is now on driving sustainable and profitable growth for the future.

David Zaslav discusses the licensing of HBO content and the success of previous deals, such as with Sky. He mentions the importance of distinguishing the Max brand as the highest quality in the streaming space and utilizing popular content, such as White Lotus and The Last of Us. However, he also acknowledges that there is content that is not heavily consumed on Max, making it available for licensing to other streaming partners. He also mentions the success of CNN and sports content on Max and the potential for partnerships with other DTC sports services.

The company has non-exclusive licenses for all its content and retains full rights. They strategically release content in windows to maximize value. The addition of news and sports content has shown positive results in terms of lower churn and increased engagement, particularly among younger audiences. The launch of CNN Max has targeted a younger demographic. The company has delayed the release of certain content due to promotional challenges, but plans to have a strong lineup next year.

Discovery is confident in their unique combination of news, sports, entertainment, and library content and their ability to generate more revenue. They recently made a deal with Reliance and James Murdoch to package their content with cricket and local content in India, making a profit and building their brand in the country. They also have ambitions to expand their Max and gaming businesses globally. While they see the benefits of sports on their subscription platform, they also recognize the importance of bundling entertainment packages for their audience.

The speaker discusses the challenges facing the company's linear business and the potential growth areas in games, sports, news, and DTC. They also mention the underutilized library and the lack of improvement in the advertising market, leading the company to focus on improving their financial standing.

The speaker is confident that the market will eventually bounce back and that the company will be well positioned to take advantage of this with their recent transformation. They also mention a favorable deal with Disney that will benefit both parties and the ecosystem. The company is also looking into growth opportunities, such as the games business, and has shifted their investment focus accordingly.

The games business has been very successful, contributing hundreds of millions of dollars to profits and showing a high return on investment. The company plans to invest more in this opportunity and sees a lot of potential for growth. On the D2C side, the company has right-sized the structure and has a state-of-the-art platform, which has led to a breakeven positive business. With the return of fresh content, the company plans to invest in marketing to drive returns. The film and TV production side should also see growth after a strike is resolved. The company is actively working on opportunities in the linear side, including restructuring the sales team and utilizing data.

The speaker discusses the growth and stability of their company in the ad market, mentioning their transparency and efforts to generate free cash flow. They also highlight their geographic diversity and strong balance sheet, which gives them the option to be opportunistic in the future. A question is then asked about the company's plans, which is not summarized.

The speaker is discussing the expected increase in content spending due to increased investment and the impact on free cash flow. They also mention that they have right-sized their spending and will reallocate within their content portfolio. The speaker also states that they stand by their profitability targets for their direct-to-consumer business and are doing better than expected.

The company has made significant progress in achieving its financial goals, with a focus on growth for the upcoming year. The key factors that will contribute to this growth include strong content, price increases, advertising strength, new market launches, and reduced churn. The D2C segment has seen a significant reduction in costs, and there is potential for further cost reduction in the network segment.

Gunnar Wiedenfels, Chief Financial Officer of the company, discusses the state of the ad market and core cutting, and how the $2.5 billion quarterly cost base can potentially come down. He clarifies that the company is not guiding down EBITDA for next year, but due to uncertain market conditions, they cannot guarantee hitting their leverage target range by the end of next year. He mentions that the focus will shift towards a more profitable streaming business, while the linear business will remain as it is.

The speaker discusses the potential recovery of the studio side following the end of the strike and praises the efforts made to right-size the business. They express confidence in the company's competitive cost structure and mention ongoing transformation initiatives. They also note the relevance of managing content investments and utilization across the company, which may lead to increased profitability for the linear business in the future.

Ben Swinburne from Morgan Stanley asks two questions to the operator, Gunnar, and David Zaslav. The first question is about quantifying the cash flow benefit from the strike this year and the incremental synergy capture expected next year. The second question is for David and is about the strategy of expanding Max with news and sports and how it could potentially impact distribution. David explains that CNN Max is largely independently produced for a younger and different audience and has been successful in reducing churn and providing value in other regions. The goal is to reduce churn and marketing costs by providing a compelling service with engaging content.

The paragraph discusses the potential of HBO Max to reach a larger audience through its availability on non-pay TV platforms and its diverse content offerings. The company believes that this strategy sets them apart from their competitors and they plan to promote it more in the future. Additionally, the paragraph mentions the value that HBO Max has added to the cable ecosystem by providing more content to subscribers. The recent deal with Charter is seen as a way to stabilize the ecosystem and increase scale.

Jean-Briac Perrette and Gunnar Wiedenfels discuss the potential for growth and reach of the company, highlighting the success of Max in attracting a younger demographic and non-pay TV subscribers. They also mention the company's strong cash flow and ability to invest in promoting and growing the business. David Zaslav adds that they expect $4 billion in synergies and $5 billion in run rate initiatives to have been implemented by the end of the year.

The speaker emphasizes the importance of continuous improvement and the company's capable team in driving cost opportunities. They also address the potential negative impact on EBITDA due to the idle TV production and licensing business, but expect positive cash flow in the short term. In response to a question about potential deals for streaming distribution, the speaker mentions the possibility of making trade-offs and cost savings, while the other speaker discusses the company's upcoming debt maturities.

The speaker discusses the company's current free cash flow and their model of investing in various networks. They believe in linear television and have good ratings. They plan to make tradeoffs and partner with operators to hold onto the linear marketplace. They also plan to use their free cash flow to pay down debt and potentially repurchase debt at discounts. The other speaker adds that they feel good about their current debt situation and have two strategies in place.

The speaker states that there will be a lot of cash flowing through and they are not planning to sit on excessive amounts of cash. They are focused on reducing their debt and their capital structure is an asset. They feel confident in their ability to pay off debt and potentially negotiate better terms as more cash becomes available. The conference call is now over.

This summary was generated with AI and may contain some inaccuracies.