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S&P 500   5,123.41
DOW   37,983.24
QQQ   438.27
5 Trends You Need to Know This Quarter
MarketBeat Week in Review – 4/8 - 4/12
Argentina's populist president meets billionaire Elon Musk in Texas — and a bromance is born
Diplomat tapped as Latvia's new foreign minister as incumbent quits following flights scandal
It's almost April 15. Here's how to reduce stress and get your taxes done
Nearing 50 Supreme Court arguments in, lawyer Lisa Blatt keeps winning
How O.J. Simpson burned the Ford Bronco into America's collective memory
S&P 500   5,123.41
DOW   37,983.24
QQQ   438.27
5 Trends You Need to Know This Quarter
MarketBeat Week in Review – 4/8 - 4/12
Argentina's populist president meets billionaire Elon Musk in Texas — and a bromance is born
Diplomat tapped as Latvia's new foreign minister as incumbent quits following flights scandal
It's almost April 15. Here's how to reduce stress and get your taxes done
Nearing 50 Supreme Court arguments in, lawyer Lisa Blatt keeps winning
How O.J. Simpson burned the Ford Bronco into America's collective memory
S&P 500   5,123.41
DOW   37,983.24
QQQ   438.27
5 Trends You Need to Know This Quarter
MarketBeat Week in Review – 4/8 - 4/12
Argentina's populist president meets billionaire Elon Musk in Texas — and a bromance is born
Diplomat tapped as Latvia's new foreign minister as incumbent quits following flights scandal
It's almost April 15. Here's how to reduce stress and get your taxes done
Nearing 50 Supreme Court arguments in, lawyer Lisa Blatt keeps winning
How O.J. Simpson burned the Ford Bronco into America's collective memory

Warner Bros. Discovery Q1 2022 Earnings Call Transcript


View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Andrew Slabin
    Executive Vice President of Global Investor Strategy
  • David Zaslav
    Chief Executive Officer
  • Gunnar Wiedenfels
    Chief Financial Officer

Analysts

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Warner Bros. Discovery, Inc. First 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 conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Andrew Slabin
Executive Vice President of Global Investor Strategy at Warner Bros. Discovery

Good morning, and welcome to Warner Bros. Discovery's Q1 Earnings Call. With me today is David Zaslav, our President and Chief Executive Officer; and Gunnar Wiedenfels, our Chief Financial Officer. 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 our Form 10-K for the year ended December 31, 2021, and our subsequent filings made with the U.S. Securities and Exchange Commission. You should have received a copy of our Q1 results. If not, please feel free to visit our website at ir.wbd.com.

With that, let me turn the call over to David.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Good morning, and thank you all for joining us. Two weeks ago, we closed our transformational merger and began our next chapter as Warner Bros. Discovery. As we begin the exciting work of bringing together the rich legacies of these two great companies, our mission is simple: to be the world's best storytellers with world-class products for consumers. It's been fantastic to finally have the teams working together. And I'd love having the opportunity to get time with the new leaders across WarnerMedia as well as thousands of employees across key locations in the U.S. And I couldn't be more impressed by the strong sense of motivation and excitement, an opportunity to unleash the potential of the combined talent pool of this new great company. These last few months in our industry have been an important reminder that while technology will continue to empower consumers of video entertainment, the recipe for long-term success is still made up of a few key ingredients: number one, world-class IP content that is loved all over the globe; two, distribution of that content on every platform and device where consumers want to engage, whether it's theatrical or linear or streaming; three, a balanced monetization model that optimizes the value of what we create and drives diversified revenue streams; and four, finally, durable and sustainable free cash flow generation. Warner Bros. Discovery emerges as a far more balanced and competitive company and uniquely positioned to deliver on these four critical ingredients.

We have no religion about any one platform or window versus another, and we intend to approach each and every decision through a lens of enhancing asset value against a set of financial returns. Our goal is to maximize long-term shareholder value and asset value, not just subs. We will not overspend to drive subscriber growth. Our focus is to invest in content and platforms that extend the life and return of our global IP and position us to drive greater returns out of each dollar of content spent than our peers and to ultimately drive free cash flow. And we will refine our capital allocation and content windowing decisions accordingly. We can maximize the distribution of our global IP in a number of ways, guided by simplicity and choice for consumers. In streaming, we have a massive opportunity to reach the widest possible addressable market by offering a range of tiers, all with the most compelling and complete portfolio of content, a premium and attractively priced ad-free direct-to-consumer product, a lower-priced ad-light tier, something we have had tremendous success with and is our highest ARPU product, and in some very price-sensitive markets outside the United States, we can even offer an advertiser-only product. We have the ability to ring any number of cash registers: theatrical, gaming, premium home video, pay TV and free-to-air broadcast. Plus streaming now with 100 million collective subscribers, it is a growing and important complement to these existing and traditional avenues of monetization and represents true optionality that, over time, will drive our strategic decision-making.

Given the depth of our content, decades of film and scripted and unscripted television series, many of the most iconic brands and franchises, including half of the MGM library, supported by a continuous pipeline of new production, together with the world's news leader, CNN, and a large international offering of live sports, we have enormous flexibility in terms of how we monetize these assets. We benefit from a deep history of world-class content production. Warner Bros. Films, Warner Bros. Television and HBO, true global leaders that are producing at scale, true content makers like Warner Bros. Discovery, with an ability to produce and control the content IP versus those that just write checks, are positioned best to win. As you've heard me say, we are not trying to win the direct-to-consumer spending war. To begin with, we firmly believe the two content companies coming together have unique advantages, including the largest film and television library from Warner, the largest domestic and international lifestyle library from Discovery and significant global live sports and news. This strong foundational offering will allow us to invest in scale smartly and will uniquely position us in our drive to become a fully scaled global streaming leader. We come into this transformational moment with great creative momentum. Just to give you a glimpse, starting with the global success of the Batman at Warner Bros. Studios; at Warner Bros. Television, Ted Lasso; and breakout hit series Abbott Elementary on ABC, which was just renewed for a second season; and of course, Chuck Lorre's unique and compelling content.

The HBO Max, which is on such a roll, fresh off record viewing for HBO series Euphoria, Winning Time, Gilded Age and Barry, the hit Max Originals And Just Like That, Peacemaker and the Flight Attendant. And in Europe, the Beijing Olympic Games at Discovery, Chip and Jo and the launch of Magnolia and 90 Day is a real strong performer on Sunday nights, just to name a few. One of the company's unique assets is the linear network group. And in 2021, taken together, we enjoyed the number one share in total television total day in all key demos and people 2+. And we have the greatest brands: HG, Food, HBO, Discovery, CNN, NBA, March Madness, NHL, Magnolia, the Oprah Winfrey Network. Our balanced verticals and content genres across scripted, lifestyle, sports and news provide us with significant opportunities to not only cross-promote for the benefit of the portfolio but also to offer compelling reach and targeting campaigns for our advertising partners. I'll speak to this a little more in a moment, but this isn't just a domestic phenomenon. In LatAm, for example, we are now the number one or two pay TV programmer in every market, and we bolstered our position as the second largest broadcaster in Europe. Again, we are excited about the strength of our sports portfolio and the optionality that gives the new company. We enjoyed our exciting March Madness and Final 4, NBA regular season and what looks to be a strong playoffs at Turner and capping off our first season of the NHL and playoffs.

Major League Baseball has just started to come together while having just completed a robust Olympic Games in Europe, as I noted. Lastly, CNN is once again setting the standard for groundbreaking and journalism first news coverage. During critical moments, the world turns to CNN. At its core, CNN is the nation's premier news outlet and has the number one digital news service in the United States with 35 million unique monthly users. The heroic reporting out of the Ukraine reminds us all that CNN is the world's most impactful news platform, and for us, a true reputational asset. From a management perspective, we have brought together a strong leadership team and a streamlined structure to foster better command and control and strategic clarity and coordination across the entire company. We've just begun to hit the ground running with the teams and the broader organization. My focus is to foster a culture of collaboration and to embrace a singular focus around being the top home for the best and most diverse talent and creators to bring their stories to Warner Bros. Discovery. We will have our heads down across the company, and we'll have a more formalized and detailed outlook across our businesses to share in the coming months. Though in the course of initial planning, integration and synergy capture, early action priority items for me will be the upfront. Like with Scripps, we are fortunate to have closed the transaction in time for this year's upfront marketplace.

We expect our presentation on May 18 to be an important opportunity for the company to share the full suite of our combined network portfolio, the top talent and personalities within the family and the breadth of genres across series, specials, news, sports, streaming and the best lifestyle content in the world. The combined strengths of both organizations' client relationships, advanced advertising, programmatic, sponsorships and direct-to-consumer, ad-light streaming services, all position the company with a unique hand. I have personally spent quite a bit of time with key advertisers and agencies. And I'm so impressed with the combined capability of our platforms and our ability to uniquely serve the needs of our clients, including integrating sports alongside our broad entertainment offerings. One offering where before it was Discovery, Warner and Sports, now as one, it's simpler and provides more value to advertisers. In many respects, we are building upon the momentum that Jon Steinlauf has built with Premier, bringing unduplicated broadcast equivalent reach and greater share to advertisers, helping us to secure a greater share of revenue. I remain very enthusiastic about the upside here and this multiyear opportunity. Direct-to-consumer. JB and his team are deeply involved in the early integration phase and go-to-market plans, having had very little interaction across the organizations during the pre-closing period.

This will take some time, though key steps to identify and analyze technology proficiencies, subscriber concentration and overlap, content opportunities, marketing and pricing strategies are all underway. Content. Kathleen Finch on the network side, along with Casey, Channing and Toby, are assessing the opportunity across the entire organization, and they are significant as drivers of both more efficient spend as well as revenue upside. Like direct-to-consumer, we will have more to say in time, particularly on windowing as well as content sharing. And finally, synergies. We have been working hard for months and are now validating and executing against those 200-plus work streams. The attack is strategic, operational, structural and financial. We will clearly take swift and decisive action on certain items, as you saw last week with CNN+, while others will take time to formulate appropriate action plans. We've detailed a $3 billion-plus cost synergy plan, and we're already on our way with coordinated efforts from our transformation office as to the waves over which this will unfold. Just 18 days in, we are as enthusiastic and excited as ever with the opportunity ahead to integrate and drive the new Warner Bros. Discovery. The leadership team is locking arms on our integration plans and long-term growth strategy, and we look forward to providing more detail on each of these in the coming months.

I'll hand it over to Gunnar, after which he and I will answer some questions.

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

Thank you, David, and good morning, everyone. What an exciting moment. It's great to finally be able to tackle the challenges and embrace the opportunities ahead as we begin the hard work to integrate WarnerMedia and Discovery. Please remember that today's call is predominantly meant to discuss Discovery's Q1 operating performance. So as you know, our merger with WarnerMedia closed just after the end of Q1 on April 8. To the extent possible at this time, I will share some reflections on our early observations as well as WarnerMedia Q1 results that AT&T disclosed last week. Starting with a quick review of Q1 results for Discovery stand-alone. Discovery's first quarter U.S. advertising revenues were up 5% year-over-year. Our next-gen advertising products like discovery+ and GO performed well, and we continue to see positive impact from last year's upfront, which helped to outpace delivery declines on the linear side. While scatter market continues to be solid with pricing up over 30% versus upfront, visibility, not surprisingly, continues to remain limited given the current macro environment. For us, categories like auto, technology and CPG are weaker versus last year, while travel, entertainment and retail remain healthy. U.S. distribution revenues were up 11% year-over-year largely driven by the growth of discovery+ subscribers throughout 2021, while linear affiliate revenues were also up year-over-year as rate increases continued to outpace subscriber declines. Our fully distributed subscribers were down 4% as were total portfolio subscribers when correcting for the impact of the sale of our Great American Country network in early June last year.

Turning to international, which I will discuss on a constant currency basis. Advertising grew 11% in the first quarter, in part helped by the Beijing Winter Olympic Games as well as underlying momentum in certain key markets such as the U.K., Germany and Latin America. That said, we did begin to see some limited impact from the conflict in Ukraine towards the end of the first quarter in markets such as Poland and Germany as well as some macro headwinds similar to the U.S. While visibility remains limited in certain key European markets, at this moment, we expect Discovery stand-alone international advertising revenues to grow in a similar fashion with Q1, excluding the Olympics impact, which was a nice positive. At the moment, we're pacing up low single digits. Distribution revenues increased 8% during the quarter largely driven by continued growth of discovery+. Do note that we did not launch any new markets during the quarter as we previously outlined and in line with our strategic thinking coming into the closing of the merger. On the linear side, we continue to see healthy growth in LatAm, while pricing pressures in certain European markets remain a headwind. This also, in part, reflects hybrid affiliate deal structures, which balance affiliate fees and B2C distribution. Furthermore, note that revenues from our Russia JV, which we announced we had exited, are recognized as distribution revenue. This resulted in a 100 basis point drag to distribution revenues during the quarter. I would also note that Discovery's exposure to Russia and Ukraine in total is less than 1% of revenues and 1% to 2% of AOIBDA. Operating expenses were up 11% during the quarter, primarily due to the Olympics.

Excluding the impact of the Olympics, opex declined by 2% year-over-year as lower marketing costs as compared to the elevated discovery+ launch than last year were partially offset by higher content costs across our portfolio. Net-net, we finished the quarter with $1.03 billion of AOIBDA, up 23% year-over-year, including a small negative impact from the Winter Olympics and roughly $170 million of investment losses. Net income for the quarter was $456 million, resulting in GAAP EPS of $0.69 per share. Now turning to some housekeeping items to consider for the quarter as you update your models. First, we recognized a $0.58 per share gain from the $15 billion notional interest rate hedges that we implemented last year. We unwound this hedge in mid-March in conjunction with the successful closing of our $30 billion debt offering. Second, the impact of PPA amortization during the first quarter was $0.49 per share. As I mentioned on our last earnings call, we decided to take a more conservative position and accelerate the amortization of purchased customer relationship intangibles. As a result of this, our Q1 D&A expense increased by $164 million year-over-year. Adjusted for the two items I noted, EPS would have been $0.60 per diluted share. Turning briefly to the WarnerMedia results that AT&T reported last week, which I'd note is based on how AT&T has historically reported the segment and which will not necessarily tie to carve-out financials or how we plan to segment the business going forward. We are working on Q1 carve-out financials for WarnerMedia as well as updated pro forma financials for Warner Bros. Discovery, and we will have those disclosed before the end of the quarter. Speaking to the reported numbers for now. Underlying performance at HBO Max during Q1 was healthy with growth of three million net adds, reflecting continued strength of the programming slate.

In total, together with Discovery's two million net adds, the pro forma company added five million paid subscriptions during the quarter. Adding the two subscriber bases, we ended the quarter with just over 100 million global D2C subscribers. So please note that we are still working through alignment of our subscriber definitions and the focus of our subscriber reporting going forward, after which we will have a more refined and detailed update when we report second quarter results. However, the operating results, as you have seen, were down in WarnerMedia's first quarter, a 33% decline versus prior year to $1.3 billion. Free cash flow was down even more, declining by $2.6 billion versus prior year and more importantly, significantly negative in absolute terms. Again, this is for WarnerMedia in the AT&T segment structure and includes elements that are not part of Warner Bros. Discovery going forward. In my mind, there is both good and bad news in these results. Starting with the bad news. Q1 operating profit and cash flow for WarnerMedia were clearly below my expectations. And given that Q1 performance and previously unplanned projects in flight, I currently estimate the WarnerMedia part of our profit baseline for 2022 will be around $500 million lower than what I had anticipated, however, with a positive offset of a couple of hundred million dollars on the Discovery side of the combined company. Opening leverage as a consequence of this, while still dependent on working capital adjustments that have yet to be finalized, is likely to be a notch higher, now estimated around 4.6 times give or take and still well below the initially modeled five times.

Net-net, being the first year of our integration, and as we've explained all along, 2022 will undoubtedly be a messy year. So a lot of moving pieces and now a somewhat less favorable starting position in Q1. The good news on the other hand is that I also see more opportunity as I work through the numbers. There are certain investment initiatives underway in plain sight that I don't think have attractive enough return profiles. As such, and with our new combined leadership team in place out of the gate, I feel very confident in our ability to rectify some of the drivers behind the business case deviations and some very quickly, with the CNN+'s decision last week being Exhibit A. And while we're still early in our integration process and are still at the beginning stages of initiating our synergy as well as strategic and financial planning, we feel more confident than ever about achieving our $3 billion cost synergy target and believe there is a much greater opportunity off of the current baseline and that target will ultimately prove conservative. And to be clear, we remain fully committed and reiterate our financial targets for 2023, and I remain very confident that we are on track to achieve our target gross leverage of 2.5 to three times at the latest 24 months after closing. We are refining a more detailed bottoms-up combined budget and long-range plan, the key insight of which we look forward to sharing in the months ahead. Prior to that, I wanted to share some high-level priorities that we are digging into early on as well as some initial financial and operational observations since close.

Number one, content. I'm working very closely with our creative and financial leadership teams to examine the totality of our $23 billion plus of annual content spend to analyze the ROI of each dollar spent. The goal of this exercise is not to identify ways to reduce what we spend on content but to harmonize processes and analytics so as to be more consistent and efficient in how we allocate our content spend across the entire global portfolio to optimize returns. Second, marketing. The combined company spends more than $5 billion each year on marketing, and that doesn't include the opportunity cost of cross-promoting assets across all of our platform. We intend to drive for the highest level of financial discipline here to make sure that every dollar spent is purposeful and measured. This will prove to be an enormous opportunity for cost synergy capture across the globe within each and every business line given the significant overlap geographically and operationally. Lastly, working capital. Since I joined Discovery five years ago, a key focus area has been to improve working capital efficiency. This has been a critical part of the formula that has led to our free cash flow conversion rate being among the top end of our peers.

Similarly, I believe we have a tremendous opportunity to continue improving working capital efficiency at Warner Bros. Discovery operationally and structurally, and this will be a key ingredient in achieving our free cash flow conversion rate targets. As I stated at the beginning of my remarks, I am invigorated by the opportunity ahead to build a unique and truly remarkable media company centered around unparalleled IP and a balanced monetization model to drive sustainable profit and free cash flow growth. We're only 18 days in and are still in the very early stages of integration and refining our long-term strategy, and we look forward to sharing more about our plans in the coming months. The new combined management team is completely aligned around our philosophy to manage Warner Bros. Discovery with the highest level of professionalism, with diligent analysis and decision-making, accountability and overarching coordination of our balanced portfolio of assets in the best interest of the company, focused on free cash flow and firm value more than anything else.

Now with that, I'd like to turn the call over to the operator, and David and I will be happy to get your questions.

Questions and Answers

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Vijay Jayant with Evercore ISI. Your line is open.

Vijay Jayant
Analyst at Evercore ISI

Good morning. Just wanted to get some perspective. Obviously, you made some decisive decision on the CNN+ shutting down. Are there a lot more opportunities across the Warner Bros. businesses that can result in material saving of costs going forward that you've sort of seen that could help the long-term cash flow story? And second, just for Gunnar, in terms of working capital and free cash flow, obviously, this year, there's going to be a lot of puts and takes with cost to achieve and fees and so forth and also the adjustments that came through the transaction with Warner Bros., I think you paid about $2.5 billion less than the original deal price. Any sense of all the puts and takes can help us with what the free cash flow trends can be given where you're starting from? Thanks.

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

So Vijay, let me start with the last one because I want to be clear. We're still working through our opening balance sheet, and there's a working capital adjustment work that's still in flight, and I'd prefer to discuss the details of those results. And we have all that fully baked and audited in, hopefully, a few weeks here. But I think the bigger picture here is as we've said, 2022 is going to be noisy. And you've mentioned some of the factors that are going to flow through. But if I take a step back here and just look at, call it, the past 15 months for WarnerMedia sort of as a carve-out group, we're looking at more than $40 billion of revenue and really, virtually, no free cash flow. And right or wrong, management has made a decision to invest a lot of the incoming funds into a number of investment initiatives.

And as I'm looking under the hood here, again, CNN+ is just one example and I don't want to go through sort of a list of specific examples, but there's a lot of chunky investments that are lacking what I would view as a solid analytical financial foundation and meeting the ROI hurdles that I would like to see for major investments. And so we're -- this is an opportunity. We're going to be able to continue the initiatives that make a lot of sense and reallocate some funds or drop some cash to the bottom line, but it's an opportunity. We're in the process of working through that.

And as I said, 2022 very much looks a little messier than probably what I had hoped for, but for 2023, I'm more encouraged than ever. And I think it's going to be very clean. Another area that you may have picked up from David a minute ago is sort of this point of not being religious about any of these decisions. We'll make decisions on the basis of the data that's available and clean financial analysis. And I think there's a ton of opportunity.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

An example of that is if we're not going to be in a particular country for a period of years, we could -- that we should be monetizing our content. As we've taken a look at the subscription platform, the -- and looking at HBO Max, which Casey is doing such a great job with, we're looking at the data, and you could see that there's a huge amount of content. You look at the wealth of the TV library and the motion picture library, that's not being used at all on the subscription platform. So basically, what content is being used and valued on the subscription platform? How do you enhance that and drive that, together with our existing content to reduce churn and drive growth? And what's not being used on that subscription platform? And how do you monetize that in a way that's meaningful? Everything should be monetized. We own more content, more compelling IP than any other media company in the world. We have a strategic focus on a global platform that reaches people either through subscription only or ad-light. But ultimately, whether it's through our existing platforms or through AVOD, we should be monetizing all the great content that we have.

Vijay Jayant
Analyst at Evercore ISI

Thanks so much.

Andrew Slabin
Executive Vice President of Global Investor Strategy at Warner Bros. Discovery

Next question?

Operator

And your next question comes from the line of Kutgun Maral with RBC Capital Markets. Your line is open.

Kutgun Maral
Analyst at RBC Capital Markets

Good morning and thanks for taking the question. I wanted to talk about streaming. The market's enthusiasm for the streaming business model has tapered off somewhat following one of your larger peers starting to see a notable deceleration in growth and calling out a number of headwinds that they're seeing to their subscriber trends. And it's interesting to me because on the flip side, your most transformational and exciting days are probably still in front of you under your new combined portfolio. So I think for all of us, it would be very helpful if you could help frame the opportunity you see ahead with streaming once more and whether or not we should be thinking about HBO Max, discovery+ services a little bit differently than some of your peers. And if ultimately your views on your DTC subscriber or ARPU trajectories have meaningfully shifted given what we're seeing elsewhere in the ecosystem. Thanks.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Thanks so much. Look, I think it's a big benefit that we're a fully diversified company. We're the largest maker of content, and whether it's Ted Lasso or -- we have over 100 series that we're producing, and the more than 50% of those are for third parties. And we're generating a lot of revenue by being a great producer and maker of content. In addition, we have our traditional business, which we're outperforming, and we're generating a lot of free cash flow. Having said that, the idea of Discovery coming together with Warner with all of this great IP and being able to reach above the globe, from my perspective, remains an even bigger opportunity. You take a look at what Netflix has done over the last several years and what Disney has done, they've plowed a path. And behaviorally, people have gotten acclimated to buying content. They've got acclimated to watching content on different devices, how to move content around. And here comes this new company with a -- with this lane. And it's why -- the middle lane is wide open for us to accelerate with the broadest and most compelling IP in the world, whether it's DC or Hanna-Barbera, Looney Tunes, Harry Potter, Game of Thrones, HBO. And so we put this all together, together with what we have at Discovery.

And when I say we're going to be disciplined -- people are spending hours a day with discovery+. We have content, a huge library about as big as Netflix. You put that together with the shock and awe of HBO Max, and the first question for us is that looks like a pretty combustible compelling broad offering. In Europe, it's sports, it's nonfiction, it's entertainment, it's HBO. To get here in the US, it's all of the content which in many months, we're the leader for women in the US with what we have. Our product is very low churn. So we start with, I think, a very differentiated, very broad, very compelling offering that has IP that people know and that's attractive to everybody in the home. And our data says that the more people that use it, the more often they use it, the higher the growth and the lower the churn. And so we're very enthusiastic about driving down that lane with our ad-light and subscription service.

But we also, in this moment of uncertainty, feel very strongly that this diversified company is going to give us the ability to have that conviction and to have that discipline, because we're generating huge free cash flow. I've been at Discovery now for 15 years. And for those of you that have followed us, we're focused. Discovery was a free cash flow machine. We were generating over $3 billion in free cash flow for a long time. With investing in our new media, which we did successfully and we learned a lot, we still were generating almost $2.5 billion of free cash flow. Now we look at Warner generating $40 billion of revenue and almost no free cash flow. And with all the great IP that they have, we bring this discipline and this focus on what are we investing in, are we investing in assets that are going to -- in investments that are going to generate real return? Is this going to help our subscriber growth? Is this going to be helpful to us on -- in our platforms? And we think that there's a real opportunity for us.

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

Yeah, look, maybe, Kutgun, just to add from a financial model perspective, all we've seen over the past 18 days is in support of the thesis that we had developed jointly through the course of this deal originally. So no change there, if anything, maybe more enthusiasm around sort of the ability to control one of the most important metrics, which is churn, by the combination of these two phenomenal content portfolios and the great work that the teams are doing here. And I mean just to answer this broader question about the streaming business model, remember, that as we've been saying all along, a lot of the synergy potential is really going to come from cost avoidance and elimination of planned expenses for the streaming business. So I do think I continue to see a very, very attractive return model here.

Kutgun Maral
Analyst at RBC Capital Markets

That's great. Thank you both. And I'm sorry, if I could just squeeze one more in. I realize it's still very early days, but now that the deal is closed, can you talk maybe a bit more about top line synergies? When you think about the combined company's scale and IP portfolio, it's fairly massive. So it doesn't really take a lot of heroic estimates across potential upside to linear advertising, to affiliate fees, to DTC, to come up with a fairly needle-moving total top line synergy number, maybe, I don't know, $1 billion or $2 billion. So any updated thoughts on the opportunity with the top line synergies and the path to get there? Thanks.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Thanks so much. In the models that we've shared with you, we don't have any revenue synergy in there. I think it's opportunistic that we closed in advance of the upfront. But it's also opportunistic that we have a -- together, we have a scaled product. And we're in the market already with an ad-light product. We're the ones that were out there very early saying, ad-light looks really compelling because it's a great consumer proposition. Our users, the churn was very low. We were doing between two and four minutes of advertising and generating $5, $6 in incremental revenue. And as it scaled, we started to make more. And so we said very early on, we're going to switch to offer consumers what they want: a lower-priced opportunity with a small number of advertising. In addition, we're in the business of selling advertising, which gives us a great advantage.

So as others, and I expect they will over the next couple of years, get into the streaming ad-light business, many will not have the infrastructure of teams locally on the ground or the ability to package older channels or free-to-air channels and markets across Europe together with that type of inventory. And finally, the opportunity of putting these two companies together -- and I've been meeting with the top agencies last week and this week with Bruce Campbell and with Jon Steinlauf, and we're talking about this exciting opportunity of what we bring to the table now: leader in live sports, news, entertainment and lifestyle. Taken together, we're bigger than any of the broadcasters. And so if you lay out the four broadcasters or you say now who the five leading players in prime time in America, by any measure in terms of reach, the ability to get demographics, the quality of the IP, the amount of live content, the amount of sports, we're in the top three. And by some measures, we're number one. And so I think that ability to offer that bouquet -- because every advertiser wants something different, who wants more sport, more entertainment, more news, but sport for us, particularly, where all the sports are locked in for the next several years.

Next year, for the first time, all of the playoffs and the Stanley Cup of hockey will be on TNT. And you have the NBA finals, TNT. You have baseball, TNT. You have March Madness, TNT. And we love that. And we've been driving that hard to create value for advertisers throughout all of Europe. So we hit every demo. And in terms of scale and opportunity for advertisers, we're very strong. We have the NBA playoffs, not the finals. But the net-net is the advertisers we've spoken to and agencies are very excited about having this new fifth player in prime time, and we would argue the number one, two or three player in prime time. And the same is true for us scaling outside the U.S. to provide more opportunity to advertisers.

Kutgun Maral
Analyst at RBC Capital Markets

Okay. Thanks.

Andrew Slabin
Executive Vice President of Global Investor Strategy at Warner Bros. Discovery

Let's take next question please.

Operator

And your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities. Your line is open.

Jessica Reif Ehrlich
Analyst at Bank of America Securities

Thank you. I have two questions. Can you talk a little bit about -- I guess there's no secret that there were tons of inefficiencies at the old WarnerMedia. So how are you approaching the incentive structure under your management team versus prior owners? That's question one. And then I know you talked a little bit about advertising, but can you talk a little bit about the approach -- it's scale, yes, which you've talked about, but you also have a broader array of assets from what I recall from -- with the old Time Warner days. News and sports were never sold with entertainment. So this seems like the first time all of these assets will go under one sales team. And also you'll have more platforms to sell. I guess, are you selling -- it sounds like you're selling the advertising for DTC within all of this at the upfront. So can you just talk about that in your approach? It obviously will show up in Q4 of this year, but any opportunity even before that in scatter? Thanks.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Thanks, Jessica. So you're right. I mean it was -- our number one thing is how do we service clients with simplicity one-stop. And so we've restructured, and in these advertising facing meetings, we've already gone out to agencies and advertisers. And it is simpler because it's -- before it was sports, it was Warner entertainment and it was Discovery. Now it's all in one. And as you said, we also have all of this digital inventory, which is in great demand, whether it's Bleacher or whether it's cnn.com, which is the largest dot.com, the largest site for news in America, together with the ad-light product on Discovery+, together with the ad-light product with HBO Max and all of our other digital assets. So it's one place to get the broadest demographics and all the different types of content that an advertiser can want. And Steinlauf and Bruce can sit down with an advertiser and address really whatever need they have, but sit down at the table as having the largest reach or close in the marketplace and the broadest scale of diverse content. So I think it puts us in a very good place to service advertisers. Gunnar?

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

Yes. On your first question, Jessica, we're obviously in the early innings here, but one thing that I can clearly say is that we're going to set incentives that are reflecting the balanced nature of the portfolio as opposed to, for example, incentivizing everyone across the company just for a subscriber goal. We got to reflect the best interest of the entire corporation in incentives and make sure that people actually have an ability to impact what they're getting paid for. And one theme that I think is going to cut across here is that we'll work hard on coordinating across the different business units to make sure that assumptions tie into each other as opposed to sort of our focus on individual business units. This is going to evolve over the course of the next 12 months, but that's sort of the high-level philosophy here.

Jessica Reif Ehrlich
Analyst at Bank of America Securities

And Gunnar, can I just ask a quick follow-up? When you said that there was a shortfall on the part of WarnerMedia of $500 million, where does that come from?

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

Jessica, as I told you, we're everything I'm saying here is on the basis of what AT&T disclosed publicly and then some internal management reporting. I do not have sort of a fully audited set of WarnerMedia financials. I don't want to go into any kind of detail here, but it's -- just take that aggregate operating profit number, and that's essentially $500 million lower what I'm seeing today for the full year than what we put in our management case that was disclosed in the S4.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Just one follow-up that I think is going to be interesting for next year in terms of sport. It will be the first year that all the playoffs for a major US border on cable where the hockey will be on ESPN and will be on TNT. And that's all the playoffs will be on us and ESPN.

Jessica Reif Ehrlich
Analyst at Bank of America Securities

Thank you.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Thanks. Next question.

Operator

Your next question comes from the line of Bryan Kraft with Deutsche Bank. Your line is open.

Bryan Kraft
Analyst at Deutsche Bank Aktiengesellschaft

Hi. Good morning. I had two, if you don't mind. So first, I just wanted to ask you about the timing for the re-launch of your direct-to-consumer strategy and products. Is that something that could happen by the end of the year? And in the meantime, how are you managing that business? Are you going to continue to invest in marketing and growing HBO Max? Or will you be taking your foot off the gas marketing there? And then separately, I just wanted to ask you how you're thinking about the challenges and the opportunities presented by account sharing. Do you see the kind of opportunity that Netflix sees in tightening that up and trying to monetize it? Is that something that you need to focus on in the next couple of years? Is that something that may be more of a longer-term focus for you? Thank you.

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

Yeah. Bryan, so thank you. So look, when it comes to the timing for the re-launch, again, I don't want to make any new commitments here. The team is working hard right now as one combined team to hammer out the exact cadence here, and we will come back to you all once we have a fully baked firm plan here. What I can say about the interim period here is we're not changing our mindset. So the priority for the team is to sort of rally behind that integrated product, and at the same pool, continue to be very thoughtful about our spend. We will not launch any new markets for the time being. We will not sort of chase aggressively behind subscriber growth as long as we are working on this priority 1, which is getting these products together. That said, all I've seen so far makes me very, very enthusiastic about the opportunity of the combined product. We've got a great cadence of content coming to the market here, House of Dragons for the third quarter. I think it's going to be exciting global phenomenon. So feel very good about it, but we'll continue to be very thoughtful as we have been going into this into closing this merger here.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

I mean it's mission central that we think these two -- that both of these products together, the bouquet of content that we provide, the wealth of content, the diversity of content, the content that's known around the globe, we believe that, that's going to be a combustible product that we could really drive around the world. And so the sooner we can get it launched but we want to get it right. It's critical because you could have a record-breaking number of people watching Euphoria, but we want to make sure that when they finish Euphoria, if we have the goods, if we have all this great content on, that we have an ability to recommend the people, you just finished Euphoria, here's the other eight shows that you would love, whether it's Chip and Jo, whether it's Oprah, whether it's 90 Day Fiance or whether it's Minx or another great HBO Max series.

But we have some work to do on the platform itself that will be significant. But we also think that one of the big opportunities here is going to be churn reduction. There's meaningful churn on HBO Max, much higher than the churn that we have seen. And so, the ability for us to come together is part of one of the thesis here that managing churn and we've seen this because we've been at it in Europe for eight years. As you begin to manage churn in a meaningful way, that provides a real meaningful growth.

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

And then maybe, Bryan, on the password sharing point, as you may have heard before, both from us and the HBO Max team, there's a process in place. There's a dedicated team. And I would just say that this is not a rampant problem here. And in fact, I think it's a small number of cases where we see a high risk of that sharing activity happening.

Bryan Kraft
Analyst at Deutsche Bank Aktiengesellschaft

Great, thank you.

Operator

And our next question comes from the line of Rich Greenfield with LightShed Partners. Your line is open.

Rich Greenfield
Analyst at LightShed Partners

Hi. Thanks for taking the question. There is a quote, David, from former HBO CEO, Richard Plepler, that more is not better, but better is better. And I know you've sort of talked about you're not trying to win the sort of content production arms race. But as you sort of think about the HBO Max strategy, does broadening HBO to HBO Max even make sense? Like should HBO just stick to the HBO ethos of like we all know what an HBO show is? Like succession, should it be broader? You just mentioned things like 90 Day Fiance, etc. Like should Discovery and CNN content really be in there? Or is HBO such a great product as it is that expanding it to be more actually doesn't make sense? I'd love sort of just how do you think about that? And how do you evaluate, especially given what just happened with sort of Netflix and Disney, both sort of realizing they have to do advertising and that some of their content may not be generating the type of sub growth that they had hoped for previously?

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Thanks, Rich. It actually makes every sense, because what you need is a diversity of content for everybody in the home. And they may come in for Euphoria, but our research shows that people watching Euphoria, their favorite second show to watch is 90 Day Fiance. So having a diversity of content, there's a reason why people are spending hours with Discovery+, because there's -- and they watch Discovery+ at different times of the day. But the same people that are watching Julia, a great new series, or are watching Gilded Age, they're turning around and they're watching Big Bang Theory and they're watching Friends. That's why HBO Max has been able to continue to grow so aggressively. And so when you put all of this diversity of content together, there's content for kids, there's content for teens, it's basically everybody in the family, why would you go anywhere else? We have all the movies. We have all the library content that you want. And I think better is better.

That was the point I was trying to make that if we have a -- if Casey and the HBO team, who I spent a bunch of time with this past week, extraordinarily talented team. They've been together, the leadership for more than 15 years, all of them. They have a system. It reminds me of the Disney Alan Horn, Bob Iger, the way that they were able to really outperform the market -- Kevin Feige, Kennedy, they were able to outperform the market with motion pictures for a period of years. You look at the way they focus on quality, whether it's Julia, Winning Time, Gilded Age, Euphoria, Flight Attendant, And Just Like That, Barry they just launched. And this is an ability to really own kind of the cultural importance and the idea that just doing more shows. You look at HBO right now, what it really needs is precisely what we have, that when they're finished with watching Winning Time, they can go and watch Friends or watch Big Bang or watch their favorite movie or go over and watch Oprah or watch some TLC shows just for fun.

So we believe, and we see this in Europe, where we tried to offer -- we thought that the answer was just to offer niche high quality that you get high-quality shock and awe content together with a lot of nutrition, in our case, in Europe, together with sport, and you offer something that everybody in the family uses, and the churn goes way down. It's much harder to churn out of a product when your kids use it or your significant other uses it or your mom and dad are watching, but also if you find yourself watching it more often. So, I think it's precisely why we did this deal. And I think everything tells us that it's going to make us stronger and more compelling because of the breadth of the quality menu of IP that we have.

Rich Greenfield
Analyst at LightShed Partners

And as you think about that, how does that impact -- obviously, as a streaming product becomes more robust and you put more of your energy there, how should we be thinking about what happens to the trajectory of sort of Turner, Discovery, the legacy cable network business? Like how do you balance that, the decline of that business versus the growth of the other? Like especially, I know it's 18 days in, but how are you thinking about that sort of trade-off?

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Well, first of all, we've been growing our traditional business. We recognize that 4% of subscribers are down and viewership on the platform is down. But when our competitors are taking content off constantly of that platform, it gives an opening for us where we're doing a lot of original content on. We're obviously all original of the CNN. Sports is live and tuned in. And then we're doing original on food, on home, on Discovery. And so -- and we see it outside the U.S.

Long term, there's no question that the business is challenging. But CPMs are increasing, advertisers still are looking for -- they're chasing and chasing for inventory because it's the most effective inventory in long-form video. And look, remember, broadcast for a period of 20 years was declining and CPMs were increasing. I was at NBC in the mid-90s when Welsh was saying, "This can't continue. We can't have smaller and smaller audiences and make more and more money." And I think he was right or maybe he'll be right eventually. But it's almost 30 years later, and the advertisers are still paying more than the hurdle rate of decline.

So we will be leaning in with efficiencies and effectiveness to our traditional business, which we think -- which generates an awful lot of free cash flow. We'll be leaning in as a maker at Warner Bros. Television where we're selling, we're an arms dealer, and we could sell content, and we're selling because we're the best producer of content. We're selling content and getting prices in bidding wars to get that content, and we'll continue to do that. And then right down that middle lane, we'll be building that important growth engine of -- starting with HBO Max and discovery+ and what we have across Europe.

And finally, I'll just say that, that traditional platform -- the other night, during the playoffs, we reached more than 50% of people that were watching television across our platforms. As Gunnar said, there's a lot of money being spent to try and reach an audience. We now have the same, or in many cases, the largest reach in television in the U.S. And the ability to use our own inventory to promote to and from all of our products and the efficiency of doing that and the cost savings of doing it I think is a big plus for us.

Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery

And the one thing I would add, Rich, is just from a financial perspective, we have a hand that I would not want to trade with anyone else in the industry. The balanced portfolio has so many built-in financial hedges. Again, I happen to believe that the linear platform is going to be around and will coexist with our other platform for a very, very long time.

But should it change, should that trend accelerate, we're positioned with more than 100 million homes on the direct-to-consumer side. Should we see more price inflation on the content side, we'll be benefiting from that with one of the top TV studios in the world. So there's a lot of flexibility. And I think it's anyone's guess how some of these trends are developing, but I think we're as well positioned as anyone in this game.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

And as the largest maker of content, we can change strategy. The world is changing. If it turns out that producing more content for ourselves because we're accelerating down that middle lane as a global direct-to-consumer business, we're not going to have to go write a lot of checks to others to get the best content because we have the factory.

Rich Greenfield
Analyst at LightShed Partners

Thank you very much guys.

Operator

And your last question comes from the line of Steven Cahall with Wells Fargo. Your line is open.

Steven Cahall
Analyst at Wells Fargo & Company

Thank you. I just wanted to ask about a couple of WarnerMedia assets and sort of take your temperature on how you're thinking about what you can do with them. Maybe first is on the DC universe. That seems like just an asset that's been under-managed by Warner, especially vis-a-vis what we've seen from some of the peers like Disney. So just wondering if you've had any time to get under the hood on DC and how you think about you might be able to use that with some of your global ambitions a little more successfully than the predecessor management team did. And then with CNN, you've shut down CNN+. We've seen this week that there are folks out there that will pay a lot of money for news and news-type platforms. It doesn't seem like news is something that scales globally in the same way you talk about a lot of your other businesses in content. So I'm just curious how core we should think about CNN within your long-term strategy? Thanks.

David Zaslav
Chief Executive Officer at Warner Bros. Discovery

Thanks, Steven. Well, first, let me start with news and CNN. The great -- I love the news business. We love the news business. CNN is the leader in news. They're the leader in global news. They're the best journalistic organization in the world, which they're showing. We've got a great new leader, Chris Licht, that's going in there. We're fully committed to it. And we think that as we look at news around the world, it's never been more important. Here in the U.S. and around the world, there is mostly advocacy networks. The ability to provide journalistic -- great journalism and facts, those two elements are the foundation of a civilized society. We need great journalism and great facts to make the right decisions. And advocacy networks that make a lot of money by generating and supporting an audience is a great business. But CNN is in the business of journalism first, and that's what we're going to fight for. But it's also -- as importantly, it's a really, really good business because we own it. When it comes to the entertainment business, whether it's DC or Harry Potter or Hanna-Barbera, those -- that's IP that we own. When it comes to sports, we're very careful about sports.

And the TNT and Warner team was clever about getting long-term rights, which we're going to get a lot of benefit from. But sports are rented. And news is scalable. We are already in Europe and the ability to take CNN around the world more aggressively and own that and the value of that because when people get up every day, there's lots of entertainment content they want to see. But as human beings, we wake up, are we okay, and then what's going on in the world. And being able to own that with the greatest brand in news is really compelling. And so we're committed to it. We think it's a differentiator. We see already in Europe that when we put it together on our subscription platform that people come to it often, it reduces churn and it increases appeal.

And so -- and finally, I think cnn.com is a new media asset. People are looking at news on their devices. And we're the leading place that they're going for news. We're pushing breaking news to people on their devices, on every device. And that creates a real connection. When people see CNN and they see that on their device, it's meaningful. And so Chris is going to start his journey in the next week or Two. I'm watching CNN, I think we all are. And it's a treasure. And what Ted Turner tried to create is something that is really meaningful. And we take that seriously. And it's a solid moment with the war in Ukraine. But ultimately, when there are war trials, the Exhibit A, B, C and D will be the great work of the war correspondents that are risking their lives to get what's going on there on video and in camera. And it's probably what differentiates this war from almost any other. And it's probably one of the reasons that's galvanized NATO and galvanized the world on what's going on because of the work that CNN has done. So we're fully committed.

On DC, I would just say we think that DC is an extraordinary opportunity. Batman, Superman, two of the biggest brands in the world, maybe one and two, maybe one and three. So I think there's over 100 characters. And let's just say that we're going to focus very hard on building a long-term plan. Batman was just very successful. It was also very successful on the platform when it dropped this past week, which I think is -- it's just one piece of data, but it's a very good sign.

I've been saying for a very long time, owning Warner Bros. Motion Pictures, together with the streaming service, together with a big factory maker of quality content at Warner Bros. Television, together with the largest traditional media business, global business, is a great recipe and a very balanced attack. But there was a question about whether opening a big movie should really collapse the entire motion picture business on streaming.

And I think -- I've been saying no, but I think now the data is starting to show no way, that when you open something in the -- when you open a movie in the theaters, it has a whole stream of monetization. But more importantly, it's marketed, and it builds a brand. And so when it does go to the streaming service, there's a view that, that has a higher quality that is -- that benefits the streaming service. And so that's been my theory.

I think Batman, the early data is that Batman did extremely well in generating viewership and in generating interest, even though it was in the most -- in the movie theaters first. So I think that's a great sign for the motion picture business. I think the motion picture business is still where you tell you the most compelling global stories because you're with other people, and it's that big screen, and it's magic. And it also gives us a chance to attract the greatest and most compelling talent because that -- you fight over it at the top of the ecosystem, and that's the motion picture business, and we have Warner Bros. And so we're excited about it.

Steven Cahall
Analyst at Wells Fargo & Company

Thanks.

Operator

Thank you. That concludes Warner Bros. Discovery, Inc. first quarter 2022 earnings conference call. You may now disconnect.

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