Ladies and gentlemen, welcome to the Warner Bros. Discovery Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Additionally, please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Good morning, and welcome to Warner Bros. Discovery's Q3 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 that 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 Q3 earnings release, trending schedule and accompanying slide deck will be available on our website at ir.wbd.com. And with that, I'm pleased to turn the call over to David.

Hello, everyone, and thank you for joining us. Let me start by saying that we are hopeful we will reach a resolution to the SAG-AFTRA strike soon. We made a last and final offer, which met virtually all of the union's goals and includes the highest wage increase in 40 years and believe it provides for a positive outcome for all involved. We recognize that we need our creative partners to feel valued and rewarded, and look forward to both sides getting back to the business of telling great stories. As the strikes underscored, these are challenging times. Our industry is facing accelerated disruption and a rapidly changing marketplace. And to succeed long term, we must be flexible and adaptable and have a strong arsenal of assets that will enable us to maintain momentum amidst ever-evolving consumer behavior. And at Warner Bros. Discovery, we are and we do. For the last 19 months, we have been relentlessly focused on reinventing this company, repositioning it as a more stable, efficient free cash flow-generating business. While we are and always will be a work in progress and while we are thoughtfully navigating industry-wide challenges like a strained advertising market, our teams continue to execute on our strategy. More broadly, we generated over $2 billion in free flow in Q3 and are on track to meaningfully exceed $5 billion for the year. This has made it possible for us to aggressively pay down our debt, which we've reduced by nearly $12 billion since launching the company last year. And as we've said, by the end of the fourth quarter, we will be meaningfully below 4x net levered. While paying down debt and delevering will remain a top priority for us, we're also now in a position to allocate more capital toward growth opportunities.…

Thank you, David. Good morning, everyone, and thank you for joining us this morning. I'm very pleased with the strong progress that WBD continues to make across a number of fronts, particularly in light of the obstacles we and the industry have had to navigate, namely geopolitical and economic uncertainty and strike-related constraints. We are operating with both greater precision and focus as well as increased flexibility and adaptability. To that point, we've turned in another solid set of operating results as demonstrated by 22% ex-FX EBITDA growth, a year-on-year increase of over $500 million and very substantial free cash flow of nearly $2.1 billion. As a reminder, this is after our roughly $900 million of semiannual cash interest payment. On a trailing 12-month basis, we have now delivered $5.3 billion of free cash flow, a remarkable improvement in only 19 months as Warner Bros. Discovery, particularly in the light of where we started. This quarter, we repaid another $2.4 billion of debt, enabling us to address nearly all floating rate debt that was issued to finance the transaction. In October, we further repaid an additional $600 million of the term loan, leaving only $550 million of this [ variable ] and lately higher interest rate debt and bringing total debt repayments since closing of the transaction to nearly $12 billion. We will continue to reduce debt as we generate cash, and net leverage will be comfortably below 4x at year-end, as previously guided. I am proud that WBD will exit this year with a fundamentally improved financial profile as compared to the beginning of this year regarding command and control, cost structure, profitability and cash flow generation and the balance sheet. Briefly on our Q3 segment results, which I will, as usual, discuss on an ex-FX basis. Overall Studios…

[Operator Instructions] And your first question comes from the line of Steven Cahall from Wells Fargo.

So David, you've now experimented a bit more with licensing, putting some shows on some major streaming partners from the HBO library. And I think you've successfully had licensing arrangements in the past, such as the deal with Sky. So as you think about some of that really strong HBO content going forward, whether it's library, whether it's prior seasons of shows that are returning like True Detective or whether it's some of the franchise shows like Friends, how do you think about what should be on Max? And what can be elsewhere, particularly when there's partners that are willing to pay a lot and maybe have bigger reach than Max? And then you talked about the engagement that you've seen on Max from CNN and sports and Bleacher. I'm curious whether you think that content sits on Max well and justifies the cost. And on the sports side, where do you see kind of sports emerging into streaming over the long term? Is it an add-on tier? Is it integrated? Are you interested in partnerships with other DTC sports services like we've heard from a peer?

Thanks so much, Steven. Well, look, we're probably the largest producer of TV and motion picture content, and we have one of the largest TV and motion picture libraries in the world. The good news is that on Max, we're getting to see what people use. And we get to see where they go first, how much time they spend with it. And so we are in the business of monetizing content through windows. There's a lot of content that we see as just for us. This is content that people come to Max for and it's important, and it's important that we distinguish the Max brand as being the highest-quality brand in the space. And really taking Casey's content out, whether it's White Lotus, The Last of Us, all of the great hits that HBO is having one of the great runs that are on Max and taking advantage of that. Having said that, there's a lot of content that's not being consumed heavily on Max, and so those are the easy ones. Everything that we license is always non-exclusive. We keep a full -- the full rights to all of that content, and we have it on Max. And in some cases, we also have it on AVOD. So we really get the Monday-morning quarterback and take a look. In terms of some of the content that you're seeing, like DC, we put those in windows. So someone might have it for 3 months or 6 months. We always have those movies, and we have the complete set of all those movies. And candidly, we have found one. We won't do it unless the economics are significant. But in many cases, it really helps us. People come back and then they want to see the full bouquet of…

And your next question comes from the line of Jessica Reif Ehrlich from Bank of America.

I mean it's clear you've done an amazing job restructuring the company and improving the balance sheet. But as you can see, even from today's numbers, the persistent headwinds from linear, which is your biggest business, is just such a challenge. So as you think through the next few years, and you've kind of outlined some of the growth areas like games and sports and news and maybe some of the traditional areas like film and driving DTC with critical IP, I'm just wondering like how are you thinking? Is that enough to offset these linear challenges? And in your conversations with advertisers, which is a big revenue driver, is it coming back to traditional? Or is it just permanently moving to digital and AVOD and retail? And I guess the last part of that is, you have an amazing library and it is underutilized. So is it -- can you help us think through, does it show up in film? Does it show up in TV, DTC, et cetera?

Yes, Jessica, let me maybe take this one. So again, you heard the comments we made on the advertising market. And the reality is, so far, we're unfortunately not seeing the improvement in Q4 that I think many had hoped to see earlier in the year. And that's why while it's early to be talking about 2024 and beyond, we thought it was prudent to be transparent about what we're seeing in the market. To your point, we don't see when this is going to turn. But what we have done over the past 18 months is we put this company into fighting shape. And I have no doubt the market is going to come back at some point. And when it does, I think we will be able to participate with very significant operating leverage given what we have put through this transformation here over the past 18 months. And also...

We're not giving up. We really believe in linear. And in fact, there was a lot of noise around the Charter deal with Disney. But to Bob's credit, that was a -- that deal was structured in a way that's really favorable for both parties and favorable for the ecosystem. The idea that all of the cable subscribers are now paying a fee for Disney+ is a positive. The -- as they have said, the churn on that will be very low. And the reach will go up, and they'll be able to sell advertising across. In an environment where there's now -- that is likely to help linear in creating a bridge. And you can imagine a world is we're redoing our deals or even advance of redoing our deals to get Disney+ and Max as an additional benefit to the cable subscribers and to be getting paid on each one of those and having -- being able to sell advertising against each of those and having lower churn on each of those. And so I think it was a very innovative deal by Charter and Disney. And although it started out noisy and scary, I think it created a, potentially, a very interesting bridge to more scale, lower churn and more stability to linear. We'll have to see. It certainly is a positive.

Yes. And so maybe to comment on the couple of the growth opportunities that you mentioned, Jessica, I do think there is tremendous opportunity, and I do think we will be able to get behind that. That's why David talked about shifting the investment focus a little bit. But starting with the games business, we've spent a lot of time over the past year going into a lot of granular detail across all of the areas of our capital allocation. And the games business has shown tremendous success, not only from a P&L perspective, really, as David said, contributing hundreds of millions of dollars to our consolidated profits, but also from a return on investment perspective. I've double- and triple-checked some of the metrics here because it's such a great investment opportunity. And I'm stunned that we haven't been investing more into this opportunity under JB's and David Haddad's leadership here. And I think we have to do more. There's a lot more opportunity there, and we're going to start tackling that. On the D2C side, again, just take a step back here, over just 1.5 years, we're now looking for this year at a breakeven/positive business after $2 billion of losses last year. We've rightsized the structure. We've got a state-of-the-art platform. And as David said, we're coming off of a quarter with virtually no fresh content on the platform. We want to get behind that. When we come back, when Casey's content comes back to the platform, we want to get behind it. We know that we can get tremendous returns on our marketing spend behind new content. And we will take advantage of that, and I do think we have a real opportunity here. On the film side and the TV production side, as I said, it's still a little fluid. Unfortunately, we still don't have a resolution for the strike yet. But clearly, that business should be coming back to growth after being a very significant drag in the second half of this year. So a lot that we want to get behind and a lot that I think is going to contribute to growth for the company. And also, on the linear side itself, we're not on the sidelines. I mean we're not just standing by and watching. There's a lot that the team is working on that Bruce Campbell and Jon Steinlauf have restructured the sales team. We've got more opportunities in dynamic ad insertion. We've got more opportunities in utilizing our data. With every additional ad-light subscriber, we're going to get additional reach, additional scale, which helps on the pricing side. So there's a lot going on. Again, I decided to be as open about the ad market this morning as I was because we feel we have to be transparent here, but there's a lot we're doing. And as I said, we're hopeful.

The other side of growth is stability and sustainability. What we've done in the last 19 months, this is -- turned this into a real company with real professional management and real free cash flow. This is a generational disruption we're going through. Going through that with a streaming service that's losing billions of dollars is really, really difficult to go on offense. It's difficult to maneuver. And with interest rates where they are, the challenges in the marketplace, advertising, this is when you're going to see which are the real companies. This is a company that's generating over $5 billion in free cash flow. We've paid down $12 billion in debt. What that gives us is stability and sustainability. And ultimately, in a difficult environment, it's going to give us optionality because we're surrounded by a lot of companies that are -- don't have the geographic diversity that we have, aren't generating real free cash flow, have debt that are presenting issues. We're delevering at a time when our peers are levering up, at a time when our peers are unstable. And there is a lot of excess competitive -- excess players in the market. So this will give us a chance not only to fight to grow in the next year, but to have the kind of balance sheet and the kind of stability of a real company, diverse, gaming, TV, motion picture, HBO, linear, that we could be really opportunistic over the next 12 to 24 months.

Your next question comes from the line of Robert Fishman from MoffettNathanson.

I have one for David and one for JB or Gunnar. David, given the increased investments that you guys are talking about, how should we think about expectations for content spending, where you'll shake out this year, and then just early thoughts on if that goes up or down next year after factoring in the video game spending and all the other factors there? And then for JB and Gunnar, given the accelerated profitability in DTC that we've seen so far, how should we think about your prior guidance about '24 and '25 profitability? And are you more confident in reaching the longer-term margins of 20% plus?

Maybe I can start here. So clearly, against from a year-over-year perspective, we're going to see increases in content cash spend next year just because we haven't been able to deploy at full speed here over the second half of 2023. But again, if we look at the change in our overall posture for content allocation, there has been a bit of a strike impact, no doubt. But we have also, as you know, significantly rightsized our spend across the various genres on the basis of a thorough analysis of return on investment. And some of that was expressed in some of the content write-offs that we did early when we combine the 2 companies, but that's also led to a reset in our overall capital allocation. And when we say we're going to invest, that doesn't mean that all of that has to come on top. There is an opportunity to reallocate within our very significant and broad content portfolio here. But net-net, as I said a couple of minutes ago, there will be a headwind to free cash flow from reaccelerating content spend next year. And before I pass it on to JB, we stand by our profitability targets long term for D2C. We do believe that this can be a very profitable line of business as a part of an integrated media portfolio. If anything, I have to say, we're doing better than we thought and we're moving faster than we thought, which is expressed -- if you just compare what we're doing this year relative to what we guided 1 year ago, 1.5 years ago, we're well ahead of that curve, which puts us in a position to focus on growth a little more as we go into next year. JB?

Yes. And I think just to add to it, when we look at the next 2 years, the things -- the levers that we rely on to get us to that financial profile that we outlined a year ago -- over a year ago really is anchored in strength of content, which David talked a little bit about, with a much more impressive '24 and I'd say an even stronger '25. Price, you've seen us obviously move on price. We've had very good results in both minimized churn and great incremental revenue growth related to our price increases around the world. Advertising strength through the release of more of the ad-light product here in the U.S. as well as more markets coming around the world, new market launches, churn reduction, which David mentioned a little bit about earlier, but we are seeing finally some great progress, particularly with the introduction of live here in the U.S. on both cancel rates and auto renewal of coming down, which are great indicators. And so we are ultimately -- we feel very confident that we're at an exciting moment over the next 12 to 24 months, particularly as we look at the global rollout starting in the first quarter next year of Max to take this to another level.

Your next question comes from the line of Rich Greenfield from LightShed.

I think if I look at your D2C segment, you've done a pretty -- you've taken a pretty incredible amount of cost out of the business. I wanted to shift and focus a little bit on the Networks segment. If I just look at the Q3 numbers, I think the cost structure is down to about $2.5 billion between cost of revenue and SG&A. How much room going forward do you have to reduce that? Obviously, Gunnar, you were very open and honest about the state of the ad market and cord-cutting, et cetera. I'm just wondering how to think about how much that $2.5 billion sort of quarterly cost base can come down and what are the big levers you can pull? And then just -- Gunnar, maybe if you could, just from a housekeeping standpoint, I think everyone is just trying to do the math on sort of what you're implying for next year EBITDA. Anything you can do -- I mean it seems like you're pointing it sort of roughly down, but I'm just curious if there's sort of any sort of range you want to point the Street to when you're thinking about leverage being higher than your target. Would be super helpful to just understand the thought process.

Yes. Rich, let me maybe start right there because I did not intend to guide down EBITDA for next year relative to where we are today. The only reason I brought this up is we had guidance out there of hitting our leverage target range by the end of next year. And again, based on the early indications that we're seeing from the market, it's developing right now. I'm just not confident to stand here today and say, don't worry about it, we're definitely going to hit that range. Now if you have a view on ad market recovery and if you think there's ad market recovery in 2024, we're going to have a great year. I'm just not in a position right now to provide firm guidance to that. I've laid out some of the building blocks, again, a much more profitable streaming business, which we're going to try to fuel growth. But again, let me be clear, that doesn't mean that I'm expecting to start losing money again. We're just shifting marginally to prioritize growth over sort of the maximization of immediate profit growth. Linear business, the Network business, it is what it is, and I'll talk about the cost side in a second. And then on the Studios side, we should be seeing a recovery as the strike hopefully comes to an end, but it's too early to be any more specific here. To your point on the linear cost base, first of all, I do want to just call out how -- what a great job Gerhard, Kathleen and others, including CNN people, have done in rightsizing the business as we brought these 2 companies together. And I think we're looking at a very competitive cost structure, which is one of the reasons why I'm so…

Your next question comes from the line of Ben Swinburne from Morgan Stanley.

A couple of housekeeping, Gunnar. I was wondering if you are able to quantify the benefit to cash flow from the strike this year. I know it's still a moving target. And then also whether there's a way to quantify the sort of incremental synergy capture you expect next year versus this year. You had some numbers in your prepared remarks. And then maybe a more interesting question for David. David, the strategy around expanding Max with news and sports seems quite logical and compelling. You're adding reach, maximizing distribution, ultimately, revenue. And it seems like you think the Charter-Disney read is a positive one, which I just wanted to hear more about because I could also see the other side of the argument, which is taking your core linear IP and CNN, the NBA, baseball, et cetera, and putting it on Max could actually cause some consternation on the distribution side of your business. So maybe you could spend a minute just talking about how you see that glide path working with your Max strategy.

Sure. Thanks, Ben. Well, first, CNN Max is not CNN. There are some hours that are simulcast, but it's largely independently produced for a younger and different audience. And it's -- we saw this in Eastern Europe and have provided real value, reduced churn and provided real value. And the people that spend time watching live content, as JB has said, and we've seen it here already and it's only 6 weeks in, you spend time watching news and sports that the engagement is higher and the churn is lower. That's a big deal. Churn is the biggest issue that we face. This is a very compelling service. The churn is too high. So we are -- this is an all-on attack to reduce churn. Reducing churn also will reduce marketing because we're going out and marketing over and over again to subscribers that are coming in and out. So the idea that a big majority, the overall majority of people that are watching Max don't have pay TV, and they're now able to come in and see what's going on in Israel, what's going on, on the floor on The Hill, is it feels like it could be compelling. And the same thing with sports, we saw real big numbers. So overall, we think this buffet, entertainment, nonfiction, as we've said all along, the better the engagement, the more people in the family are watching, the better we'll be. We still and it -- we still haven't really been able to crack the kids. We have a huge amount of kids' content. We've not been able to crack that. We're going to attack that as well. So we think that strategy is -- really differentiates us, and we're going to have to really promote it. We haven't been. JB, you're at ground level here.

Yes, I was going to add. The only other thing, Ben, is you got to remember, HBO and HBO Max and Max now have really been doing the opposite of what the industry has sort of been complaining about, which is for HBO subscribers, we've been giving more value to the bundle, not less. They got -- they used to get a number of HBO Original series and movies. They now, in 2023, get all of that plus a whole host of library content from Warner Bros. that they never received, Max Originals that they never received. And so our position in the market for years has been providing more value to the cable ecosystem for those subscribers, not less.

And the Charter deal really creates this very creative path of instead of having 2 completely separate ecosystems, so the idea that you could have a distributor that's paying us a per-sub fee for discovery+ and a per-sub fee for Max, and both of those being ad-light, is an incremental advantage. It's an advantage to Charter. And they and Bob came up with this creative road forward. But it -- I think and we think is it stabilizes the ecosystem, but it also is helpful in building more scale. JB, you and I were modeling it out the other day.

Yes. And I think David's point on scale is exactly right, which is we know this business has always needed reach. And we're looking, as we said and David, I think, and Gunnar's prepared remarks, the encouraging thing that we've seen already in the last month with those sports and news on Max has proven out further is these customer segments are increasingly complementary versus cannibalistic. And so the age demographic we're seeing, the much younger demo on Max and the non-pay TV, the vast majority of the viewers being non-pay TV subscribers leads us to believe that these 2 can coexist and should coexist if we want to be in a max -- reach maximizing strategy, which we do. And so we like the profile of it, and we think we can continue to find constructive ways to work with our traditional affiliates to make it work.

And we've got the cash to invest in promoting it, to invest in taking it around the world and to invest in whatever else we think we need to grow. I mean the key element here of this company now, this company is a free cash flow-driven company, over $5 billion in free cash flow, $12 billion paid back so far in 19 months. We said we were going to be less than 4x levered. We will be less than 4x levered comfortably. So it's all about, I believe, not only the quality of the content, but what's the stability of the company. It's all about free cash flow, who has it and who doesn't.

And then, Ben, to just comment on your first 2 questions. So starting with synergies, again, it's going to get incrementally more difficult to differentiate between what's the synergy, what's transformation, what's just normal cost work. But to recap what I said earlier, we -- I expect $4 billion total synergy to have flown through until the end of this year. We will have implemented initiatives that will generate $5 billion of run rate initiatives, and we're still going. We're still adding to the program, and I think that's the most important point. While we might not be reporting on this in detail anymore, while we might not call it synergy, we have had a continuous improvement team at work for the past 5 years. We never stopped after integrating Scripps and Discovery because the environment around us keeps changing, and we're making sure that we've changed faster than the environment around us. We've got a very capable team that's got 5 years of experience. We will keep grinding through every cost opportunity in the company, and we'll keep delivering. And then to answer your strike question, again, this is everything but a precise science, right? But my current estimate for the full year is there's probably going to be a few hundred million dollars of a negative impact on EBITDA. The TV production business and licensing business is a major part of our studio operation and has been essentially idle for the best part of this year. And on the positive side, at least from a short-term cash perspective, I expect several hundred millions of dollars of positive cash flow flowing through from the fact that we're unable to deploy capital. Again, that's a short-term point, and those are my best estimates right now.

And your final question comes from the line of Brett Feldman from Goldman Sachs.

Two, if you don't mind. David, you obviously see the value in being able to get your streaming product into a deal similar to the one that Disney got with Charter. Of course, the trade-off there was that Disney had to agree to drop some channels. So I'm curious if you're willing to make a similar trade-off in order to get that type of distribution and churn improvement for Max. And I'm also curious whether that might lead to some cost savings if you were able to arrange something like that. And then, Gunnar, you talked about there's an average of about $3 billion of debt maturities over the next couple of years. That's obviously well below the current free cash flow run rate. So I'm curious from a modeling standpoint, should we be assuming that you'll not only use your free cash flow to pay down debt maturities, but even go into the open market and repurchase debt at discounts? In other words, is there any particular reason you would need to sit on cash?

Sure. Let me start by saying we've gotten through, including recently, all of our deals with all of our channels being carried. We really do have a different model. We have affinity networks, HGTV, Food, TLC, Discovery, Animal Planet, and we're investing in TBS, TNT. We're investing in all those channels. We still believe in linear. And then -- and with sports and news, we're anywhere between 25% and 45% of the viewership on cable. So when you think of what is basic cable, it's us. And when people think about what they love, the 3, 4, 5 channels that they love, it's us. And so I think -- and we're not that expensive. We're not proud of it, but it's one of the reasons we've been able to continue to get increases is because we provide real value and we're one of the few media companies that's still investing significantly in original content, and we're nourishing our audiences. And if you look at our ratings in the last couple of months, Kathleen is doing a terrific job, the ratings on our networks are going up. And so we feel really good about our deals. We feel good about partnering with the operators in building and continue to hold on as much as we can to the linear marketplace. And we can make some trade-offs. There's a few of our channels that are lighter. We can make some trade-offs. But I think it will be additive. And I think it will be a real advantage to us to have somebody else in the marketplace that wants to retail and guarantee a payment of a significant number of subs to us.

And then, Brett, to your question on the debt side, look, 2 things. Number one, there's going to be a lot of cash flowing through here. And to answer your question directly, no, there's no need to sit on excessive amounts of cash. And as we said multiple times, we're focused on reducing our debt to that target range as quickly as possible. And number two is our capital structure is a real asset. Again, I went through earlier, the average maturity, the average interest rates and the trading levels of the debt. And I feel very good about our ability to further chip away at that overall debt quantum and potentially at very attractive terms as more and more cash becomes available here.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.