Ladies and gentlemen, thank you for standing by, and welcome to Warner Bros. Discovery, Inc. Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Additionally, please be advised that today's conference call is being recorded. I would now like to hand the call over to Mr. Andrew Slabin, Executive Vice President of Global Investor Strategy. Sir, you may now begin.

Good afternoon, and welcome to Warner Bros. Discovery's Q4 Earnings Call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects and financial performance. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company's filings with the U.S. Securities and Exchange Commission, including, but not limited to, the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q4 earnings release, trending schedule and accompanying slide deck is available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.

Hello, everyone, and thank you for joining us. We've been hard at work since our last call and look forward to updating you on our progress. First, let me say, this promises to be a very exciting year for our company. We took bold decisive action over the last 10 months, and the bulk of our restructuring is behind us. We have full command and control of our business, and we are 1 company now. We have a fantastic leadership team moving us forward, everyone rowing in the same direction. And together, we are focused on making our businesses better and stronger. Last year was a year of restructuring. 2023 will be a year of building, and off we go. In today's increasingly dynamic and a crowded media environment, the best hand has great storytelling IP, brilliant creatives, a full slate of production and distribution capabilities, and broad global reach that stretches across premium, pay-TV, free-to-air, theatrical, streaming, licensing and gaming, the entirety of the ecosystem. And that is exactly the hand that we have, and we intend to play it decisively and with a focus on free cash flow and an eye towards sustainable future growth. Warner Bros. Discovery is a storytelling company, and we are very fortunate to have a huge share of the most beloved and globally recognized storytelling IP in the world, including Harry Potter, Game of Thrones, Superman, Batman, Lord of the Rings, and we intend to take full advantage of these one-of-a-kind franchises across our various platforms. In all that we do, we are guided by 3 strategic pillars. We want to tell the best stories, share them with the broadest audience possible, and we do that by working together as 1 team, 1 company. The decisions we've made and the strategies we've set…

Thank you, David. The fourth quarter marked the end of a first and very defining chapter for Warner Bros. Discovery in which we took some pivotal initial steps. Among them, the integration and repositioning of our global finance organization through which we implemented a number of initiatives to drive efficiency and better support the company's long-term sustainable growth. We've accomplished a significant amount in 2022, and I'd like to take this opportunity to thank the entire finance team for their persistence and resolve in working through these very difficult but necessary first steps, which has resulted in greater command, control and precision across the enterprise and laid the foundation on which we are positioning the company. This is in part a function of a successfully executed synergy program and ongoing continuous improvement efforts. With respect to these initiatives, we are working on a total potential opportunity of $5 billion over the next few years. That is what we're tracking in our system today, specific initiatives with associated direct financial impact, responsible owner and detailed milestone plans. Naturally, and as I have said before, not all of these initiatives will come to fruition or get realized to the full extent, but this represents a significant pipeline for us as components of both near-term cost out and longer-term continuous improvement. And to that end, we are now confident in a path to at least $4 billion of savings largely addressable through 2024, representing an increase of $500 million over our prior estimate. Through the end of 2022, we've already realized over $1 billion of synergy, inclusive of a couple of hundred million dollars of course-corrective measures that we undertook early after launching Warner Bros. Discovery in April last year. We are laser-focused on delivering against our high-level strategic, operational and financial targets,…

[Operator Instructions] Our first question comes from Jessica Reif Ehrlich with Bank of America.

So David, as you said, '22 was a year of really heavy lifting and you had challenges really in every division, whether it was film, advertising, CNN, et cetera -- I mean, macro, et cetera, D2C. As you look out to '23, I think Gunnar kind of touched on some of the potential tailwinds, but it sounds like you're walking away from close to $12 billion in EBITDA to maybe low to mid-$11 billion in EBITDA. I'm just wondering if you can talk about some of these assumptions. Clearly, you still have some macro challenges, but what could go right? What's in there for that upside, which is something that you didn't really talk about that much, but it's new. And on the potential for the balance sheet, the balance sheet improvement is very encouraging. Does that include any potential asset sales, like nonstrategic asset sales? You have so many hidden assets within the company. Is there -- what are you considering?

Thank you, Jessica. Let me start with the second question. The guidance does not include any asset sales. There are some opportunities that I'm looking at below deck as we say, but none of that would be baked into this leverage guidance. And on the...

Non-strategic.

Yes. And on the 2023 outlook, look, it's early in the year, and there's a number of uncertainties as you wouldn't be surprised to hear. And I'm very, very glad that we put out some targets in the summer of last year, and we were able to hit those targets. We're putting these targets here out for 2023 with the same mindset that we want to hit or outperform that guidance. We've gone through a couple of the puts and takes here. The biggest unknown continues to be in the ad sales environment. We have a lot of points to be very excited about. We're going to be releasing 12 films, 6 games. One of them is off to a very good start. So a lot to be looking forward to. We're excited about JV's product relaunch in the second quarter, but those are uncertain factors very early in the year. And I'm not taking anything off the table here, but I just want to be realistic as well about what we're seeing today.

And we hit this year with a full leadership team in place. We met with 186 of the top leaders in -- for a week in early January. This is 1 team now. Everybody has a strategic focus on improving free cash flow, market share for each of the businesses. We have command and control of each of the businesses. And I think our diversity, we have all these different assets that have -- that are different. Some are advertiser-driven. The gaming business is all consumer product driven. And I think that diversity is strength.

Our next question comes from Michael Morris with Guggenheim Partners.

Appreciate all the information you just shared. I'd like to ask about advertising trends you're seeing and maybe kind of advance this discussion a bit more. Really trying to understand how much of the ad impact that you're seeing is kind of coming from the macro environment? How much do you feel like is more reflective of some of the underlying trends that just have to do with ratings declines or core cutting and those types of trends? If you could share your view on those 2 impacts, that would be very helpful. And my second question is about this pending relaunch Max product. Is there any of your content that's definitely off the table to be included in that service? And so I think of the investments that you make in live sports content on Turner, live content on CNN, are those types of things definitely are -- or they structurally not able to be put on the service? Or is that something that might fuel that service?

Let me start with the second. In addition to all of our entertainment and nonfiction, we do have all of our news and sports. And that gives us real optionality in terms of nourishing audience for growth and for reduction in churn and for overall price value. We'll do a full presentation on April 12, which will lay out this significantly improved product, the launch, what will be on it. JB, anything to add to that?

No. I think the focus right now is obviously continuing to on the expanded entertainment offering, and we think the complementary of the HBO Max and Discovery Plus entertainment offering is significant and will be a major step forward for consumers who are looking for simplified number of choices, more breadth of options in terms of content all in one place and for good value. That's what we're looking to primarily deliver. But as David said, we've got sports and news that today are really untapped in the streaming world, and those are optionality for what we might be willing to do in the future, and we'll share more of that on the 12th with you with more detail.

And in fact, we're -- we use news and sports quite effectively in Europe, and we've learned a lot about when it does work and when it doesn't. On the advertising side, it's kind of a complex answer. I'll just take a swing at it, Gunnar and you can follow. The market is -- the macro environment is very challenging. It's significantly better outside the U.S. right now, which is a surprise. The sentiment is not terrific. The scatter market overall is very slow, I would say, steady to maybe a little bit better than it was in the fourth quarter. But the digital inventory, which really held up in the fourth quarter has also softened. We have an unusual situation. On the one hand, we have tremendous breadth with live news, live sports, entertainment, nonfiction, a tremendous share and reach. Having said that, we closed this deal right before the upfront, and we're first bringing our teams together. We've effectively done that now, but we had to take 2 different sales teams and pull them together. So I think that I'm hyper-focused on this, meeting once a week with the team, but getting our stride as a new working team, and I feel like we're starting to get some momentum on that. We also made a decision in the upfront to drive price rather than extra volume. And I believe in that, having been in this business for 30 years, I think in order to really drive asset value, you need to drive price. And we were able in the upfront to drive price significantly more than all of our peers. But in order to do that, we took less volume than we could have. And now you see a very soft scatter market. So that is having some impact on us versus others that were -- that took a much bigger position in the upfront. Having said that, as we face this next upfront, which is coming up in 2 months, I think the breadth of our content together with where we go in on price, positions us very well. And so we'll keep in mind this balance of volume versus price. But I always would err toward price, because I think that's where you really build asset value. And we've also introduced digital advertising on HBO, which advertisers are very excited about being able to be in these marquee shows. And we're doing it in a very tasteful way by putting it on the very front end. Gunnar?

Yes. No, the only thing I would add is from the perspective of cyclical versus secular, there's no doubt. I mean, pot levels in the industry, I think, were down 14% in the quarter. Arguably, we've done a little worse than that, partly driven by the scheduling or the sports schedules that David mentioned a couple of minutes ago. But I also think we're very well positioned to grow from here. Kathleen is doing a lot of work, getting the enormous value of our library on screen. We've got some tests going on and it's very early, but some of the numbers that are coming in are looking exciting. She's also restructured the team with development-focused doers, who are running this portfolio as one integrated portfolio. And we've got a time-tested approach to cross promotion, and we're adjusting that right now to the larger portfolio and the larger number of assets that we're promoting. We were able to put that to work behind some of Casey's launches, behind some of our film launches. And we're seeing some real opportunity here. So I think we're very well positioned. In terms of the market itself, it's -- as I've said before, it's not a good environment. We do see the weekly bookings right now ticking up slightly if you compare January and February with maybe the November, December time frame, looking a little better. Retail, fast food, entertainment, a little better, telecom small, but coming back, but then you've got other areas like technology is still completely depressed. So again, as I said, a similar picture with more diversity. International, some areas actually trending up now, others still difficult. It's just too early to really call a trend change here, but...

Though we are assuming that things will get better in the second half.

Yes. We're assuming that. And I have no doubt that when the market turns, we're going to be in a very, very good position to capture that upswing as well, especially, as David mentioned, with more inventory on the digital side becoming available here, which last year was sort of a limiting factor for us.

Our next question comes from Brett Feldman with Goldman Sachs.

There's been an increasing discussion recently about what the right general entertainment content strategy supposed to be for media companies as your models continue to pivot and become more streaming-centric. We've heard the word curated. I think you used it during your script. You also hear a bigger discussion around how you decide when something should be exclusive to your platforms and when maybe you should be licensing. So I was hoping you could just give us your most updated thoughts, so we kind of have that framework for assessing the new product when you rolled out on April 12.

Thank Sure. Well, one of the big advantages that we have Brett, is that we have this diversity of content. And as we think about where we put content, as Casey looked at HBO, we were able to see which content are people spending time watching, what content is really powerful to us in terms of reducing churn. And then there was a lot of content that just wasn't being viewed. And so we were able, in many ways, to Monday morning quarterback. That's what led us to the conclusion that direct to streaming movies were providing really no value to us. And so -- which -- where we pivoted and said we were going -- pushing to move all of our films back out with real windows in order to optimize those products. So we're excited about the fact that we're going to take all of the Discovery content and put it together with the HBO Max content in a much better platform. But the key to this company is, as a storytelling company, we have this diversity. We have storytelling and games with Hogwarts, which is really off to a tremendous start for us. We have Channing and her team right now with the #1 or #2 show on almost every platform in America where we're selling to all of our -- to our peers in the business. And then we have the ability to pick from all of these different baskets to build really what may be most important for us, which is a successful and profitable streaming business. That HBO Max, whatever we call it on the launch, is a product that we take around the world and that has a real impact on how people consume content. We believe in it because we believe we have the best menu of content, the best portfolio, the best quality. And we're curating now in a way that's having an impact on America. And so I think that is key to us in terms of building the long-term strength. But the other key is that we have the largest TV and motion picture library and we're the biggest producer of quality content in the world. And so selling that to drive free cash flow and to nourish the overall segment, so that we, as a media segment, can be successful is important.

In answering that question, you reiterated something you'd said before, which was an intent to fold the Discovery content into the new product. There have been some media reports a few weeks ago that you were going to actually keep Discovery as a stand-alone product. Is that something you're able to comment on now?

Just simply that for those that have Discovery right now, the churn is very low and it's profitable, Discovery Plus. Many of those people are going to want to move up to a bigger product, more robust with a bigger offering. For those that are happy paying $5 or $7 and having home, food discovery and own type content. Our strategy is no sub left behind. We have profitable subscribers that are very happy with the product offering of Discovery Plus, why would we shut that off. And it is shared -- the platform itself for Discovery Plus will be a shared platform. So we have a best -- we have all this work that we've done to build this platform will be taken, so that to the benefit of all of our subscribers on all of our different products.

And Brett, just to be clear, the Discovery content would still be available on the bigger relaunched combined product. No question about that.

Our next question comes from Ben Swinburne with Morgan Stanley.

Two questions. David, if James and his DC strategy is successful, which I'm sure is your expectation, what does that mean for the company overall over the long term? Obviously, successful films will help your studio segment earnings. But -- and I know it's a tough question to put numbers around. But just as you think about the impact of DC sort of fully realizing the opportunity over the next 5-plus years, what could that mean to Warner Bros. Discovery and sort of the earnings power of the organization? And then, Gunnar, you sound very bullish and confident on the D2C targets, the $1 billion of EBITDA in '25. Can you talk a little bit about the revenue outlook for D2C? You had 6% growth this quarter, a lot of that from advertising and content. But do you need revenue growth to accelerate in order to deliver that $1 billion? Maybe help us think about the levers you have and your expectations around top line over the next few years?

Thanks, Ben. Well, look, we were laser-focused on building this DC 10-year plan. James was writing Superman. We were spending time with him and Peter, and he had a vision for DC that we are all in on and believe in. He presented that to you and the press about a month ago. It's one of the biggest value creation opportunities for us. I think it could and should be huge because it wasn't being pushed on. If you look at DC, Harry Potter and Lord of the Rings, and then you take a look at Warner as a company without those 3, okay? It's -- those 3 of the tentpole products that when someone's at dinner anywhere in the world, and they look at their watch at 8:00 and you mention Batman, Superman, Wonder Woman, Harry Potter, Lord of the Rings. In every country, they'll leave dinner and they got to go home to view that product that they love. It gives a huge advantage with those tent poles. And so we are a storytelling company. But we -- I believe that we have an overwhelming advantage in the marketplace with the IP that we own, but to take -- to get that advantage, we have to create great content with that IP. So that storytelling IP. We haven't done a Superman movie in 10 years. We haven't done new Harry Potter content in over a decade. And Lord of the Rings, which is a fantastic franchise. And Andy Jassy was pushing on it at Amazon with a lot of success, but we own those movie rights. And so we want to optimize that as a unified strategy for the company. And we take that across film, TV and even to sell to third parties, because we have something -- we have a treasury that no one else has. And for us, DC alone will be -- could and should be a game-changer. And I think there was a lot left on the table. We got to take those swings. We got some of the best creatives in the industry right now focused on those swings.

Yes. And Ben, on the D2C question, let me start with the revenue side of it. We definitely are planning for an inflection on the revenue side. Keep one thing in mind, the entire last year was impacted by this headwind from coming off of Amazon. And we've lapped that now, and we're seeing some growth now. We will always be a little lower maybe than sort of a pure-play D2C product just because of the HBO linear trends that are baked into our revenue number, but we'll definitely -- we're definitely planning for revenue improvement. And then on the cost side, all of the trends are pointing in the right direction. We see better engagement, better churn, which makes marketing efficiencies come up. We've rightsized the content investments. And we have high hopes for all of these metrics after the combined product launches to further improve. And later down the road, we're also obviously going to start looking at new market launches, again.

The only other thing I'd add, Ben, is for us, it's not just a question of subscriber scaling. Yes, that's one important ingredient. So we do see subscriber scale as one part of the revenue growth story. We see price as a very important second part. Internationally, as I've said before, we look at our pricing is significantly under where we think the market is. We see churn as a third important variable that historically has been relatively higher on the HBO Max product that with the 2 products coming together, that ultimately coming down is important. And then obviously, with the new product, we just look at some of the features that we're going to be rolling out and some of the improved and enhancements from a performance standpoint in the product at a much higher engagement, which will help both our AdLite monetization, including, as David mentioned earlier, the fact that we're now putting ads and all the content on HBO Max as opposed to just some of the content on HBO Max, all those will be part of the revenue drivers in addition to obviously having the rights like we talked about before, for all of our sports in the U.S. and news content eventually that could also help us drive further scale and pricing in the years ahead.

Our next question Comes from Robert Fishman with SVB MoffettNathanson.

I have 1 for David and then 1 for JB or Gunnar. First for David, as part of the upcoming D2C relaunch, can you just talk a little bit about how you plan to balance protecting the HBO brand while at the same time, leaning on the HBO premium content to help drive the new service going forward? And then for Gunnar or JB, can you maybe just expand upon your fast strategy and why you chose to do the deal with Roku and Tubi and maybe how that might impact the launch or timing of your own fast service?

Sure. Look, the symmetry of the Discovery Plus content, which is heavily viewed for hours a day, mostly during the day and infringe against the HBO content, which is watched more -- Discovery Plus maybe more passively, HBO more with family, that the more research we do, the more we look at it, the more we think these fit together very well with appealing content to everybody in the family. And so we're feeling more and more confident about that. On the 12th, we'll lay out to you, we have a clear attack plan where we'll drive this really across the country and into markets around the world with conviction. But we'll take you through what that plan is and how we intend to do it on the 12th, but well locked and loaded.

On FAST. Sorry, Robert. On FAST, look, the strategy is, I think, back to some of the questions earlier, at the end of the day, one of the advantages we feel like we have is the question keeps coming up about windowing. The reality is, in today's environment, I think it would be -- you wouldn't want us to say we have a static a 100% defined windowing strategy. The reality is the market is evolving so dynamically that what we are doing is as 1 team, looking at all the different windows and what our real asset is having actual distribution assets in almost every form of media, whether it be linear television, on-demand television through streaming, games, theatrical distribution, free-to-air, pay-TV. And having all those distribution outlets gives us the optionality to look at what the data shows us and see where we need to lean in further or not. FAST is one area that as we look at the evolution of consumer behavior, we look at obviously a lot of the free-to-air viewing moving to, what we call, free-to-view online. And we don't yet have, we think, a strong enough position in that market. The Roku and the Tubi deal was really just a toe in the water, if you will, 14 channels, a beginning for us, but there'll be more to come as we go through the year, and we do want to have a bigger presence in that space because we do see consumer behavior continuing to shift and having a very robust amount of consumers around the world, who will want to consume ad-supported content. And with the breadth and depth of content that we have across the company, we think we're very uniquely able to do that without jeopardizing or risking the subscription business, the theatrical business or some of our upstream windows, which we'll obviously continue to focus on.

Our next question comes from Kutgun Maral with RBC Capital Markets.

I want to follow up on the streaming discussion. You've been ahead of the curve here, but it seems like everyone these days is reshaping their streaming strategy in pretty profound ways, whether it's their org structure, their content spend, types of content investments, philosophy around content exclusivity and licensing, international, pricing and just so much more. I think the focus for many of us is usually each company's top profitability, but maybe there's not enough attention to the fact that each of these moves could have pretty dramatic impacts to the industry and competitive landscape. So I know it's a pretty open-ended question, but can you talk about how you see the streaming industry evolving overall with these changes? And where does the WB fit in that?

Well, look, for us, the market right now -- our focus is building a best-of-class product and putting all of our content together and so that it's easy to consume and that people are aware of all the different content that we have. I do believe, as JB said, and we do believe, as a company, that we'll sort of recreate this -- the streaming service, which is ad free, then which -- then there'll be AdLite. And then we ourselves will run our own fast service. And so effectively, whether you want to look at content for free, you want to look at with ads, you want to look at -- you want a premium that we -- you would have all that opportunity with us, and it makes sense because we have the largest TV and motion picture library in the world. And we can create a Tubi or a Pluto without buying content from anybody by just being able to put it on ourselves. And so we -- as the largest owner and producer of content in the world, we'll -- we want to super serve effectively our streaming service, which is a top priority as well as an AVOD service so that we could reach everyone in every country, everywhere in the world. But in addition, we want to run this company to drive free cash flow and the ability to monetize a lot of the content that isn't critical to subscriber growth and that isn't critical to -- or helpful to churn. And having some of that content appear on our platform and sell it nonexclusively to others is very economically beneficial. And the good news is we've had a real chance to look at content on each of the platforms over the last 2 years. And we could see, for instance, at HBO, the majority of viewership of content on HBO was only 40% of the content. So there was 60% that was hardly being viewed. And why should we need to monetize that in order to drive shareholder value. And once we establish this funnel, then we can take things like the first season of succession or the second season. We can put that down on our AVOD service. And then if you loved it, you can come up and you could then pay for on AdLite or in subscription. And basically, we create a flywheel of our own, where we own the full ecosystem, the subscription, the AdLite and the ad free. And we take advantage of all the content that we have.

And I think I just only add that...

Go ahead.

Yes. No, I was just going to say that as David has said before, I think the industry obviously was at a scale at any cost. We said starting last August, we believe in profitable scale. The industry was in a quantity of content over quality. We believe in a quality over quantity and therefore, spend-wise, spend needs to get rationalized. And at the end of the day, the consumer is at a point in time where they want more choice and better breadth of choice from fewer services, because they just don't have either share of wallet to be able to spending on 5, 6, 7 services anymore. And so you put the Discovery Plus and HBO Max proposition together at a great value, and we think we deliver something that ultimately has something for everybody in the household, which will help us on scale and help us on churn, which are the 2 major ingredients we're focused on as well as obviously engagement. The other point that is front and center us is curation. There's loads of content out there. But curation, creating content at a time when people can watch it, creating a community conversation. If you look at the last of us, it was growing every week, Euphoria, to be able to deliver 20 million, 30 million, 35 million people in America watching and to have it be a conversation. Storytelling content is most powerful when you're watching it and then you're with others, either in a theater or you're able to talk about it either online or with your friends, that's the power of content, not when you're viewing content alone. Content alone is really only half of the equation. And curating content so that people can watch it and have a shared experience is…

Our final question comes from John Hodulik with UBS.

David, maybe just to sort of wrap up that on the content side. A number of your competitors have cut back on the total amount that they're spending on cash content in '23 versus '22. Is that -- it sounds like you guys have, on the one hand, a lot of new programs, a lot of new movies and a lot of new initiatives, but at the same time, pulling some content on the platform, just what should we expect in terms of '23 versus '22? And then on the affiliate side, renewing 30% of your affiliate deals. I mean just how should we think of sort of pricing and how should that translate into sort of results as we look out to '23?

Gunnar, do you want to start?

Yes. Look, I mean on the content spend, remember, all our strategy changes leading to the content restructuring and write-offs over the course of last year, obviously, that's going to flow through cash as well as we adjust. But that said, there's always going to be a place for quality content and we're open for business. It's the backbone of what we're doing, and we'll keep investing.

And one of the tenets is -- we're not going to launch any content before it's time. We have a lot of motion picture content that we're reworking and making a lot of progress with. The Hogwarts game, we took several additional months to rework it, to get it right. It's not about getting it out quick. It's not about getting it out for a certain date. It's about telling the best story. And so we're going to be -- Casey is the best example of that. Channing is the best example of that. And now we're -- this year, you're going to see us fighting on DC. You're going to see us fighting at Warner Bros. on the Motion Picture side in order to really -- I think there's a huge opportunity on the Warner Bros. Motion Picture side for investment in quality content and storytelling. But it's -- we're not going to tell any story before its time. And I think you're going to see a big difference that when we release something, it's going to be a product that we think is the best it could be.

And regarding the linear affiliate renewals, as we've said a couple of times that we're very happy with how those discussions went, clear testament to the importance and the value that our network portfolio is delivering to our affiliates. Taking a step back here, though, I mean, the reason why -- one of the reasons why we carved out the linear business, the network business as one separate segment is to be completely transparent about where those trends are moving. And as I've said before, net-net, that's not a segment where I would expect a sustained revenue growth. That's not the point. It's about the sustainability and the longevity the free cash flow being delivered by that segment. And to that point, I have no doubt that we have years and years of that coming our way.

Q&A session is now closed, which concludes today's conference. Thank you for attending today's presentation. You may now disconnect.