Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery
Thank you, David, and good morning, everyone. Thank you for joining us today for our second quarter earnings call. Echoing David's comments, I am very pleased with our operating performance this quarter, in which both our traditional core linear business alongside our next-generation streaming platforms combined to deliver very healthy revenue growth and impressive AOIBDA and free cash flow conversion. While comparisons against last year's advertising performance were very favorable, we are especially encouraged by the acceleration and sequential improvements we've enjoyed from every region around the globe and returned to near pre-pandemic levels. The US, Latin America, EMEA and Asia Pacific all turned in impressive results. And of course, discovery+ is providing a nice tailwind to our performance. Turning to second quarter results, beginning with the US segment. Advertising revenues increased 12% year-over-year as we continued to take advantage of a very robust advertising market for both linear and digital inventory. We saw strong demand in all key categories, including CPG, pharma, cosmetics, auto, retail and home improvement, far more than offsetting the software viewership across the industry as compared to the peak COVID Q2 of last year. Scatter CPMs were up 50% plus versus last year's upfront and up more than 30% year-over-year.
Additionally, next-generation advertising demand was very healthy across our suite of products, with revenues up 70% year-over-year. Specifically for discovery+, more than 800 advertisers have now bought inventory on the platform, more than four times the number of advertisers that we had targeted by the end of the second quarter. Interestingly, more than 90% of all clients who have bought inventory on discovery+ also bought inventory at our Go and TV Everyware offering, underscoring the power of integrated audience solutions across our suite of digital products. Furthermore, we continued to roll out new ad products on discovery+. For example, we recently launched GreenLight, an ad product that allows clients to own the first ad served to every user on discovery+ on a specific day. As noted earlier, the strength of the upfront market underpins the continued relevance and importance of television as an advertising medium, contributing to greater confidence in our ability to drive top line advertising revenue growth. While we faced comparisons against political advertising in the second half of the year and some modest headwinds from the Olympics here in the US in Q3, layering in the tailwind from this upfront, we should enjoy sequentially faster revenue growth in Q4 over Q3.
Distribution revenues grew 12% year-over-year on a reported basis or 18% like-for-like, primarily driven by continued traction and monetization of the Discovery Plus subscriber base, helped by linear affiliate pricing, offsetting the year-over-year decline in pay TV subscribers. Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio of subscribers were down 7%. However, recall that we sold Great American Country during the quarter. When adjusted for the sale, total portfolio subscribers would have been down 3% year-over-year during the quarter, as we continued to benefit from specific distribution gains across certain networks from recent renewals. We will begin lapping those renewals in the coming months. And you should expect to see our linear subscriber trends more in line with the industry going forward, as we have discussed prior. Worth noting also is that the sale of GAC did result in a modest headwind to both reported advertising and distribution revenue this quarter as we did not recognize any contribution for.
Turning to the International segment, which I will, as always, discuss on an ex-FX basis. Advertising revenues increased 70% year-over-year as we saw significant growth off the second quarter last year. We saw a strong revenue growth across all regions, with the pace accelerating throughout the quarter with a number of key markets nicely above 2019, as David mentioned. Distribution revenues increased 6% versus the prior year, supported primarily by direct-to-consumer subscriber growth. Though as noted, there were no material new market launches during the quarter. This was partially offset by lower linear affiliate rates in certain European markets. Total company operating expenses increased 33% during the quarter. Cost of revenues increased 25% year-over-year, as sports returned to a more normalized schedule this year versus virtually no sports last year due to COVID related shutdowns, as well as the continuing investment in B2C content.
SG&A increased 43% versus the prior year, as we invested in marketing and personnel to support our Discovery+ rollout. We continue to focus on driving efficiency in our core linear networks, and we remain on track to reduce core linear opex in the low to mid-single-digit percentage range for the year. As we guided, we reduced our losses from investment projects significantly in the second quarter to roughly $250 million versus more than $400 million in the first quarter, benefiting from both strong next-generation revenue growth, as well as more efficient marketing spend, primarily in the US. Q2 next-generation revenue growth of 130% is annualizing at a $1.6 billion run rate. And we expect additional sequential quarterly revenue growth through the year and beyond. As we launch new markets during the second half of the year, we expect that we will continue to incur investment losses, though more or less in the same ballpark as this past quarter, mainly driven by content and marketing costs. We continue to expect that investment losses will peak this year.
Overall, we remain very pleased with all of the core KPIs we closely monitor, and we continue to track well against our internal plans. Global direct-to-consumer ARPU remains consistent with Q1, as the impact of certain international distribution partnerships and associated early promotional activity is offset by our strong and growing US ARPU, which is nicely supported by the AddLife Discovery+ product. Roll to pay still remains high at an average of close to 80% across the global DTC portfolio, as average engagement per viewing subscriber, which is more or less in line with what we saw last quarter. As well, we remain pleased with overall churn, which naturally is at the lower end for the most mature subscriber cohorts and skews higher for the most recent one. As I noted, the vast majority of our international Discovery+ growth thus far has come from existing markets. And we plan to launch in a number of key markets and territories during the second half of this year, including Brazil, Canada and the Philippines, alongside additional Vodafone markets in Italy, the Netherlands and Spain around the end of the year. It is worth highlighting that a handful of these market launches have been extended out about a quarter or so later than our original internal plans call for, primarily resulting from the requisite harmonization of our technology platforms, the added benefit of which will enable us to roll out an international AddLife product.
This has been a heavy lift, particularly given team constraints related to COVID in our tech hubs, primarily in India. Other puts and takes to consider will be our ability to maintain and keep subscribers that come in during the Olympic Games, though the initial role to pay numbers look very encouraging. At net, we remain very excited about our local go-to-market strategies across these important countries through the end of the year. Turning to housekeeping items. Net income for the quarter was $672 million or $1.01 per share on a diluted basis. First, please note, we recognized a $0.09 per share gain on the sale of Great American Country, as well as a $0.09 per share noncash gain on an existing investment in Sharecare, the company that recently went public. Second, our effective tax rate during the quarter was negligible, as we recognized certain non-cash tax benefits totaling $16 2 million or $0.24 per share. Given these tax benefits, we now expect the full year effective book tax rate to be in the mid-teens range. For cash taxes, we are now anticipating a slightly higher rate in the high 20% range for the year, excluding PPA amortization, as we are positioning our tax footprint for optimal outcomes across a number of legislative scenarios for 2022 and beyond.
Third, and finally, the PPA impact was $0.30 per share. Adjusted for the above, EPS would have been $0.89 per diluted share. Now turning to free cash flow and our leverage. We generated $757 million of free cash flow in the quarter, representing a near 70% conversion rate of AOIBDA, notwithstanding the continued investments we are making as well as the return to normalized content production levels. Year-to-date, our AOIBDA to free cash flow conversion rate is nearly 50%, and we remain confident that we will convert at least 50% of our AOIBDA for free cash flow this year, even with the anticipated new market launches and slightly higher cash taxes mentioned earlier. At the end of the quarter, our net leverage was 3.25 times, which is within our current target range. We expect our net leverage could be temporarily at the high end of our target range due to the Olympics in the current quarter. As a reminder, we do expect to recognize the $175 million to $200 million of AOIBDA losses during the third quarter as a result of the Olympics, though we continue to expect that we will break even or generate slightly positive AOIBDA and free cash flow over the life of the deal.
As indicated, when we announced our transaction with WarnerMedia, we did not repurchase any shares during the quarter, as we continued to invest in our next-generation initiatives and conserve cash ahead of the closing of the deal. And finally, we now expect FX to have roughly a positive $100 million year-over-year impact on revenue and a negative $20 million impact on AOIBDA in 2021. We continue to operate on solid footing, dynamically growing our direct-to-consumer business, with contributions to our top line growth becoming increasingly meaningful and optimizing the resilient and optimizing the resilient core linear business, creating strong conversion of AOIBDA to free cash flow. We remain focused on delivering solid operating performance while we built the framework to support long-term sustainable growth and shareholder value. And we are eager and excited, once we gain all the repost approvals to roll up our sleeves to capture the tremendous opportunities offered by our proposed merger with WarnerMedia. And of course, we look forward to speaking with you at the appropriate time on our thoughts and plans around integration, strategic direction, synergy, etc..
With that, I'd like to turn it back to the operator to take your questions.