Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Inc., First Quarter 2021 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Also, please be advised that today's conference 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.

Everyone, thank you for joining us for Discovery's Q1 Earnings Call. Joining me today are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perret, President and CEO of Discovery Networks International. You should have received a copy of our earnings release, but if not, you can access it on our website at www.corporate.discovery.com. On today's call, we will begin with some opening comments from David and Gunnar, and then we'll open the call to take questions. Before we start, I'd like to remind you that comments today regarding the Company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they 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, 2020, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Good morning, everyone, and thank you for joining us today to review both our Q1 performance and the meaningful progress we are making since our launch of discovery+ across our operating segments, brands, and global markets. I couldn't be prouder of how our company has executed, nearly flawlessly, responding with creativity, precision, and focus across the board while at the same time, accelerating the pace of innovation throughout our organization as we embrace substantial growth opportunities around the globe. We continue to reposition the Company and put it on a path of sustainable growth for the long term. Our ability to generate free cash flow is crucial, allowing us to fully fund our pivot and underscoring the efficiency of our model. Indeed, even during this moment of increased investment, as clearly evidenced in our financials this quarter, our free cash flow machine is working harder than ever, and it is reinforcing an evolving narrative about Discovery's differentiated hand. With the strong global launch of discovery+, we are now scaling a very well-received global direct-to-consumer offering that complements our incumbent linear channel presence in every television market worldwide. In Q1, Discovery had the most watched domestic pay-TV portfolio. Internationally, we enjoyed an impressive seventh consecutive quarter of linear share growth, anchored by our 27th straight month of growth in our female genres and best-ever quarterly performances in several markets, including the U.K., France, and Germany. This growth was supported by the continued global expansion of our Scripps lifestyle brand and content. We achieved this while simultaneously launching and building discovery+. Our continued strategic focus leverages Discovery's powerful, competitive advantages: well-established consumer connections in every market in the world, vast local language IP ownership, deep and expanding distribution relationships, and a super-efficient content production model to power both our global direct-to-consumer expansion and our core linear business. To achieve this, we are investing more than ever before in our content across the board to support these platforms. So far, in 2021, it is all coalescing and exceeding all of our early benchmarks across almost every KPI. We are pleased to report that just four months into our U.S. launch of discovery+ and with the vast majority of our international expansion still ahead of us, we have 15 million total paying subscribers across our global direct-to-consumer base, and we continue to move forward with strong momentum. When I think about our 15 million direct-to-consumer paying subscribers that we have today and the fact that we were able to add 10 million paying subscribers since the end of last year, we're just really impressed with our traction. At the end of Q1, we crossed 13 million paying global subscribers, representing subscriber growth that compares quite favorably to our peers over the same period, underscoring the value, appeal, and stickiness of our content all of which supported our conviction about our opportunity ahead. But our subscriber count tells only part of the story. We are equally encouraged by early metrics and KPIs across engagement, churn, monetization, and ARPU, particularly in the U.S., which likely place us at the very top of an impressive list of peer offerings, many of whom have had a far longer runway thus far than we have. Roll to pay has been between 80% and 85% of three trial subscribers. Engagement is approximately three hours per day per viewing subscriber and well ahead of linear. The retention is strong, giving us confidence that while early monthly churn is trending towards low single digits. Consumers clearly love the discovery+ product. We see that on social, in the App Store product ratings, and the feedback from partners, clients, and talent in the marketplace. Our App Store ratings rank among the sector's top. Our Apple App Store rating is 4.9 based on a very large number of reviews. Our strong early KPIs are driving exceptional monetization. Our $4.99 AdLite product with only four minutes of commercial time generated over $10 of ARPU in the quarter, already well ahead of our longer-term goal, and it's still trending up. Our overall blended U.S. ARPU of around $7 is already in line with what we generate in linear, and we see healthy momentum for that figure to grow during the course of this year. And on a global blended basis, we are seeing ARPU of over $5. Gunnar will provide some additional detail on metrics and KPIs. But in short, we are working towards a sustainable customer lifetime value, particularly when contrasted against the cost to gain a subscriber, encouraging us to lean in from an investment standpoint when it comes to marketing, content, and technological capability in order to maximize this meaningful growth opportunity. We have an extremely focused approach on all the ways we can be available to the broader swath of users while driving a rich and dynamic user experience. A cornerstone of this will be expanding our partnerships with many of the world's leading distributors and platforms. We recently launched on Comcast Xfinity Flex and soon on X1 and are deepening our relationship with Amazon around the globe with availability on Prime Video channels in the United States and a global rollout plan for other PVC markets. Now let's look at Italy. It's a great example of a market where we see encouraging early signs of the long-term growth potential against which we are executing our strategy, bringing together our market expertise, strong local talent, sticky original content, management resources, relationships, production and technology infrastructure, and popular brand and channel presence. Like a number of other markets in Europe, Italy is relatively underpenetrated with respect to pay-TV at roughly 20% with really one main distributor. It has significant mobile penetration and usage, and Discovery enjoys a healthy pay and free-to-air presence with depth in local language content. And though we have grown our audience share, the existing pay-TV market structure limits the upside from this segment of the ecosystem. The launch of discovery+ has catalyzed a new growth trajectory. Our addressable market has grown more than 10x from pay-TV to now include mobile and broadband. discovery+ enables an entry cost for premium video that's more than 75% more affordable than traditional bundles. And discovery+ ARPU is already more than 3x greater than our wholesale portfolio. This is a powerful combination of potential universe and price growth. What we are seeing in Italy guides our thinking on the prospects of what our other international markets would look like. There are significant markets such as Brazil, Germany, and Australia with similar characteristics and where our ability to offer a direct-to-consumer offering, packaged with mobile or multi-platform operators, should ultimately result in new customers, higher ARPUs, and a deeper direct connection with ARPU. Of equal importance is the balance we have been able to strike across all linear and direct consumer businesses, reflecting on our Q1 performance, which, by many measures, is still facing COVID-related headwinds. I'm proud of our team's ability to manage through difficult operating circumstances. And you will see that in our Q2 outlook. Gunnar will take you through the details, but I'm pleased to note that in every international region, we're seeing positive advertising growth versus 2020, with record shares in Q1 from major markets like U.K., France, and Germany. We are seeing great resilience in our advertising business, not just internationally, but also domestically. This, taken together with very strong scatter pricing in the U.S. and public spending across the globe, gives us confidence in our advertising outlook for the balance of the year, especially with the growing discovery+ opportunity. We couldn't be more excited to present to our advertisers at this year's upfront on May 18 at a time when our brands and programming have never been stronger or more relevant. At the same time, growth in both domestic and international distribution revenues will be boosted by discovery+. Net-net, we see a healthy inflection in our revenue trajectory against the global backdrop of improving underlying advertiser demand and continued share gains, particularly in our international markets. Taking a step back and assessing where we are as a company, I'm extraordinarily optimistic. We've gotten off to a great start with discovery+, exceeding our expectations, and are effectively managing through a dynamic, fluid, and exciting time as I have ever seen in my many years in the media business. We are encouraged by the engagement and reception of discovery+ from our consumers, advertisers, and distribution partners around the globe, underscoring the strength of our differentiated end. This is an early tailwind that gives us great confidence as we lean even harder into our pivot. Yet as important as discovery+'s success is to the future prospects of the Company, of equivalent importance is our core linear business, the foundation of the Company and backbone of our strong free cash flow. As we drive long-term sustainable growth, it is imperative that we nurture both sides of the Company as interconnected and supportive of one another. Thank you, and I'd like to turn the call over to Gunnar. After which, JB, Gunnar, and I will take your questions. Thanks so much.

Thank you, David, and good morning, everyone. My aim this morning is to provide a slightly more detailed peek into the operating model as well as our near-term outlook than what we would normally do, in large part given the recent volatility. To the extent that this has created additional questions and/or concerns, my goal would be to help alleviate it as much as possible this morning. 2021 is off to a great start. As David just mentioned and which I'll provide a little more context around KPIs, particularly in the U.S., where we launched at the beginning of this year, engagement, monetization, and churn as well as implied customer lifetime value continue to reinforce our belief that prioritizing investment in discovery+ will generate superior returns on capital. As noted, engagement is truly stellar with viewing subscribers watching roughly three hours of content per day, well ahead of linear, and nationally, an underlying contributor to both retention and monetization. Retention is indeed looking very encouraging with churn coming in quite a bit lower than we had initially anticipated. While it is still too early to evaluate a stable monthly churn rate, the retention curve of our first subscriber cohorts is looking very encouraging. Based on these early observations, we expect a trend towards low single digits over the course of the next 12 months. Turning to monetization, which is also well ahead of plan. The ARPU for discovery+ in the U.S. is already in line with our $7 linear channel going by the strong monetization of the AdLite product where ARPU has already exceeded $10 in the first quarter. Clearly, strong engagement in watch time despite offering only a 4-minute commercial load is amending themselves to healthy advertiser demand and returning exceptional CPEs. Still early days, though we see a notable path for further monetization as we continue to scale, drive additional engagement, attract additional advertisers and brands, and roll out new advertising products. Global ARPU is over $5 with international ARPU, as expected, below that of the U.S. This is in part due to the market price points and in part because we are launching the greater share of our subscribers coming through promotional partnerships, which drive faster adoption and marketing efficiency but also come at an initially lower ARPU. That being said, we are in virtually all cases seeing ARPUs that are multiples of both the existing wholesale linear pay-TV at which we currently monetize it. This, of course, is a core tenet of our international discovery+ strategy and a great objective testament to the quality and value of our content in the marketplace, not limited by the boundaries of the traditional pay-TV ecosystem. Taking these metrics together, we are modeling a much more substantive estimate of customer lifetime value while subscriber acquisition cost is currently running at a very healthy cushion to that. Based on these trends, we are increasingly more confident with our outer year projections and our target margin profile of 20% at scale. While it's still too early to formally update this number, we believe there is meaningful upside to the target based on all these initial indicators trending above our business case assumptions. During the first quarter, next-generation revenues increased 52% year-over-year. And we look to build upon this momentum in Q2 with next-generation revenues set to more than double yearly, driven by both volume of subs and modernization. We did invest heavily in marketing spend in the first quarter to support the U.S. launch of discovery+ and rebranding and play in key international markets, a sizable portion of which was dedicated to upper funnel brand marketing to build awareness as well as bottom-up funnel performance marketing. This accounted for the vast majority of the year-over-year increase in OpEx alongside content and investment. In the aggregate, next-gen OIBDA losses were roughly $400 million in the first quarter. We expect a modest sequential improvement in next-gen losses in Q2 as continued substantial marketing efforts to roll out additional territory and requisite content and tech spend will begin to be offset by more material revenue contributions. Also, we expect to better optimize a refined marketing spend as we gain additional insights. Quarter-to-quarter losses and what ultimately falls into 2021 versus 2022 is still subject to a number of moving pieces, and we will obviously provide as much transparency as possible ahead of such movements, particularly as impacted by rollout plans around the Olympic games, planned technology spend, platform integrations, and determined by specific partners. That said, we continue to remain confident that 2021 will represent the peak year for loss from our investment initiatives. Of course, we are as mindful as ever about the magnitude of these expenses and their impact on our financials, yet we are reassured by the compelling return metrics against this. Now turning to the segments. In the U.S., advertising finished down 4% during the first quarter, in large part due to universe estimates and sub-level declines, which ultimately translated into lower impressions across the industry and our networks. That said, we continue to outperform our pay-TV network peers on share during the quarter. Moreover, pricing remained robust, and scatter CPMs developing strongly during Q1 are expected to be up around 30% year-over-year with roughly 50% premium versus upfront in Q2. In fact, total dollar volume for Q2 scatter will be up considerably versus last year as we see categories such as auto and travel coming back as well as from the input of B2C companies, including many new TV advertisers. discovery+ has started to contribute to advertising revenue in Q1 as subscribers grew throughout the quarter, and we expect an increasing tailwind from this component through Q2. As such, we expect U.S. advertising revenue to grow in the low double-digit range, helped in part by COVID comps, strong pricing, and advertiser demand across the businesses. U.S. distribution revenues were up 12% during the quarter, at the high end of our expectations. Mid-single-digit linear distribution revenue growth continued to be supported by contractual filling fee increases, partially offset by pay-TV subscriber decline. Subscribers to our fully distributed linear networks declined by 2%, while our total pay-TV subscribers declined by 4%, likely top of peer performance, helped by additional network carriage resin affiliate renewals and continuing share gains at virtual MVPD where we remain very well canvassed across all key platforms. In addition to our healthy traditional affiliates business, the launch of discovery+ and the subsequent ramp-up of subscribers accounted for much of the sequential acceleration in distribution revenue growth. During Q2, we expect reported distribution revenue growth will accelerate further even against a much tougher comparison given the significant one-time benefit recognized last year, implying a significant acceleration on an underlying basis, supported by similar drivers as in Q1. Turning to international networks, which I will discuss, as always, on a constant currency basis. Advertising was up 8% during the first quarter as all international regions, EMEA, LATAM, and APAC, returned to growth, the first since the start of the COVID-19 pandemic. Latin America developed positively driven by Brazil and Mexico. And despite intermittent lockdowns in certain EMEA markets, we saw mid-single-digit growth across the region due to continuing share gains in key markets like the U.K., Spain, and France. Finally, APAC was also up significantly during the quarter. In Q2, as we comp the substantial declines faced by the advertiser industry last year during the initial stages of the COVID pandemic, we expect international advertising revenue growth to exceed 50%. International distribution revenue was down 2% in Q1 due to lower linear pricing in certain European markets, partially offset by our growing discovery+ subscriber base. We expect international distribution revenue to accelerate to mid-single-digit growth during the second quarter, driven by the same factors. As we called out in prior quarters, as we reposition a number of key international distribution partnerships towards a hybrid-type structure, we've opted to trade nearer-term upside on the linear portfolio for greater support for our DTC efforts. Segment performance has already reflected some of the impact of this over the last two quarters. Turning to the expense side. Total operating expenses for the consolidated company were up 21% during the quarter. Cost of revenues were up 2%, largely due to the continued rent and content investment to support our next-generation initiatives and the timing of sports content in Europe, partially offset by more efficient content spending. SG&A increased 48% to reflect marketing and branding as well as personnel and technology spend to support our next-generation initiatives. As we guided previously, we continue to target low- to mid-single-digit percentage reductions in our core linear business offerings. Turning to free cash flow. We produced Q1 free cash flow of $179 million with an AOIBDA to free cash flow conversion rate similar to the prior year quarter. We remain confident and reassured in our ability to financially support all of our strategic endeavors as we continue to convert AOIBDA at a highly efficient rate despite the initially significant ramp in our investments. We did not buy back any shares during the quarter. As I noted earlier, we continue to review investments in discovery+ as the best fundamental use of our free cash flow in order to drive sustainable growth in shareholder value. Further, for the next few quarters, we also want to maintain an appropriate amount of financial cushion as the cadence of our global discovery+ rollout remains fluid, both in terms of where and when we launch and the level of investment required to penetrate specific markets. And while we are investing against a rigorous financial framework, bear in mind that we're gearing up for two sets of Olympic games this summer and in Q1 next year, both of which will be critical events for marketing our DTC and linear brand. We will, of course, continue to update you on our views on capital allocation as we progress, quarter at approximately 3.5x net leverage, and needless to say, remain fully committed to our investment-grade rating. Turning to a couple of housekeeping items. Number one, as you may have noticed, we are no longer disclosing adjusted EPS as AOIBDA to free cash flow continues to be the key financial metrics in evaluating our operating performance. I will, however, provide you with the PPA impact each quarter as well as point out key note items to help calculate an adjusted EPS number to the extent helpful. For the first quarter, PPA was $0.32 per share. Number two, we expect FX to have roughly a positive $40 million year-over-year impact on revenues and around a negative $25 million year-over-year impact in AOIBDA in 2021, reflecting the strengthening of the dollar and sterling since the start of the year. We are operating on strong footing, evidenced by a rapidly growing direct-to-consumer business and the resilient core linear business. And our ability to convert AOIBDA to free cash flow where I continue to see at least 50% this year has never been more valuable considering reinvestment demands. We have a self-funded business aimed at supporting immense global direct-to-consumer opportunities. We couldn't be more excited as a management team to focus on continuing to deliver solid operating performance while we build the framework to support long-term sustainable growth and shareholder value. I'd like to turn it over to the operator to start taking questions.

Your first question comes from Robert Fishman with MoffettNathanson. Your line is open.

Full year core, U.S. affiliate fee growth after excluding next-gen revenues for the full year? And then more broadly, have you seen any pushback from launching discovery+ in domestic affiliate fee negotiations? And maybe if you can talk to whether the launch of discovery+ on Xfinity should be viewed as incremental or cannibalistic to your overall partnership with Comcast? Thank you.

Let me begin by addressing your last question. We are very enthusiastic about the upcoming launches. Our numbers indicate that we've been adding approximately 1.5 million subscribers monthly over the past two months. It's important to note that these figures may fluctuate, but the Comcast launch is poised to be a positive development. To answer your question, I believe there will be a significant additional impact, similar to what we've observed with other deals after they launched. We are also anticipating other international events in the coming months that could aid subscriber growth, particularly the Olympics. Regarding the U.S. affiliate side, we're pleased with our distribution across the entire ecosystem, as we're seeing robust and increasing contributions from discovery+ and our direct-to-consumer initiatives. Additionally, the core business shows a solid underlying trend. The linear subscriber numbers have improved somewhat compared to the average over the past 18 months, with only a 2% decline for our core networks. We've maintained roughly mid-single-digit growth in the linear segment. Regarding your question about renewals and the impact of discovery+, we are continuing to receive fee increases, which has contributed to our growth in the fourth quarter and now into the first quarter. We've had positive discussions about both past and upcoming renewals. As you've heard, discovery+ plays a significant role in these discussions, but it's just one of many factors. Ultimately, it hinges on a rational assessment of the economics. We provide nearly 20% of our affiliates' viewership. We're a strong partner, investing significantly in content this year, making it available to our affiliates at a highly competitive rate. While I won't make predictions on individual renewals, I can say that the discussions are constructive, and we feel we're in an excellent position.

I would like to add that outside the U.S., we have been establishing genuine partnership arrangements, such as with Vodafone and Sky, which have been viewed positively. Comcast, being a strong operator, has launched us on Flex, and we are about to launch on X1. This creates a fantastic partnership for both parties. Comcast is able to provide value for us, and we are in discussions with several other distributors. This collaboration is not competitive; rather, it benefits both sides. Comcast is a leader in broadband, and their channel stores have grown significantly. With Flex and X1, there is great potential for value creation for both of us. As mentioned, our share of traditional channels is increasing, and they are successfully selling those channels at a very low cost. We are likely the top player in that area, delivering substantial value within the bundle. Since the launch of discovery+, we have renewed several deals and performed very well.

I just realized I overlooked part of the question. We're not providing a full year flat growth outlook for all the known reasons. However, I mentioned earlier some insights into the second quarter, so let me expand on that. We delivered 12% growth in Q1, and I anticipate an acceleration from this figure. I'm not being more specific because it will partially depend on the pace of subscriber additions on the D2C side, which is now significantly impacting revenue. It's important to remember that last year in Q2, we had a substantial one-off item that will pose a challenge for us. When I refer to acceleration from the 12%, I mean that despite this one-off factor, we may see high single-digit growth on an underlying basis for the quarter, which, in reality, translates to high teens growth, showing an improvement over the 12%.

Our next question comes from Doug Mitchelson with Crédit Suisse. Your line is open.

It's a bit challenging to address the questions here. David, how are you managing the content on Go in comparison to discovery+ and the linear networks? Have you noticed any changes in your content strategy based on what people are watching on discovery+? That's my first question. Secondly, it seems that the upfront seems to be increasing by 15% to 20% for CPMs compared to last year. It's still early, and there's more to come, but the initial outlook is very strong. Do you have any thoughts or comments regarding Discovery on that? Lastly, could you clarify when the ad load at four minutes will start to increase? Or do you plan to keep it at four minutes if it proves to be effective?

Thanks, Doug. I haven't seen 50% increases in CPMs from the previous year's upfront before. The CPMs are very high. We have an advantage because broadcasters have been getting over $60, while we've been receiving less than half that. Now, we are making progress in booking significant dollars in the high 40s and even $50. This improvement is partly due to our increasing market share and popular shows like 'Mail on Discovery' and '90 Day Fiancé,' which is currently the number one show on television. As a result, we are being paid significantly more. Our CPMs are likely to improve further since we have room to grow compared to competitors with much higher levels. We are entering this upfront at an opportune time. Additionally, we now have substantial inventory on discovery+, which is selling very well. This means we don't have a viewer disadvantage compared to broadcasters, allowing us to get paid for every subscriber. Our strong demographic is also contributing to much higher CPMs than those seen in traditional media. Overall, the advertising market is very robust, and we feel positive about the upcoming upfront. We have discovery+ viewers spending over three hours on the platform, coupled with our highest ratings and very low churn, which reflects the quality of our product. Interestingly, our top original shows and popular channel content account for only about 10% of overall viewership. We possess a broad content library comparable to Netflix, and viewers are spending considerable time on it. While we lack a single breakout hit, this diversity has resulted in much lower churn than our competitors, along with increased user engagement, which is yielding impressive advertising revenues that have surprised us. We will keep experimenting with how we distribute our IP, as we currently have several originals on discovery+ and more in development. This will continue worldwide, along with local content outside the U.S. JB, could you provide insight on our balance as we explore opportunities outside the U.S. for discovery+?

We are committed to leveraging our strong local content alongside the universal stories from our U.S. pipeline. We're experiencing the success of this strategy in existing markets, and we haven't launched in new markets since highlighting discovery+'s progress. The growth we've noted is a result of better utilizing the content we've invested in, starting with earlier versions on discovery+ and later extending them to free-to-air or pay networks, including exclusive content on discovery+. This content combination is performing exceptionally well, and we are continuously analyzing consumer feedback to make necessary adjustments. Regarding advertising, we promote our service with a five-minute ad load but are currently operating with a lighter load. We intend to maintain this level for now, but we have the option to increase the ad load in the future if needed.

And then, Doug, I just want to add that there's a lot of potential ahead. Currently, the trends are very positive, and we have considerable opportunities without altering the consumer experience. We're tracking over $10 in average revenue per user for our main product. As you'd expect, there's been a favorable trend throughout the quarter as we've grown our subscriber base and attracted more advertisers. This creates a positive dynamic. If you take a step back, this is why we're so excited: First, we've transitioned from just selling a commercial demo. There's a significant difference between linear TV and our digital platform. We are now selling every viewer on discovery+ and TV Everywhere. Additionally, we have a more equitable market environment. The substantial gap between cable CPMs we've talked about for years no longer applies. It's premium online video, and we're receiving full value for our product. Moreover, our audience is highly engaged, with statistics that are likely among the best in the industry in a family-friendly content context. Combine that with the scarcity of premium online video inventory due to most viewership occurring on ad-free platforms, and you have a high-demand and competitive market right now. I also want to emphasize that we are still in the early stages regarding our advertising offerings. We recently launched our Binge advertising product with pause ads and are developing more features. This is part of our effort to prioritize getting all these features released, and there are several great ideas in the pipeline. I believe that, even without adjusting the number of ad minutes, we will see a positive trend for our ARPU in the coming months.

Our next question comes from Kutgun Maral with RBC Capital Markets. Your line is open.

First, regarding the international pay-TV ecosystem, one of your competitors recently decided to close several networks in parts of Asia to concentrate more on different areas. Can you update us on the trends you are observing with linear TV pay-TV subscribers in your major international markets? Additionally, how comfortable are you with the sustainability of those trends compared to potentially shifting more towards streaming? I have a follow-up question as well.

In terms of the international pay-TV landscape, we are observing a stable, possibly slightly increasing trend globally. This has been an ongoing situation rather than a new development. Unlike the U.S., where we've experienced more churn from higher-tier packages, international markets are seeing more cord shaving in certain areas and significantly less cord cutting. Overall, we believe the situation remains quite stable, although it’s challenging to generalize across all international markets. Some specific markets, like Brazil, are facing difficulties, with a decline in subscribers as the middle class has been particularly affected over recent years. Yet, on the whole, the pay-TV universe appears stable, and we anticipate that it will remain so, albeit with some fluctuations in different markets. There will be continued movement from premium packages to slightly lower-priced tiers in select areas. Regarding the decision to shut Asian channels, we are being selective rather than completely closing down channel portfolios. We are focusing on markets where we see long-term potential for offerings like discovery+, as highlighted by Gunnar and David. We have committed to this strategy in select markets, like Denmark, and will keep exploring such opportunities as discovery+ continues to expand internationally. This will be assessed on a case-by-case and market-by-market basis.

The current market feels very strong for us. We are experiencing significant growth in both our ad revenue and affiliate revenue. Our ad revenue is increasing rapidly, which helps us build strong relationships with every distributor. We can offer value to distributors in bundles, especially where pay-TV penetration is only at 20% to 30%. They are very supportive of us with discovery+ and eager to reach a broader audience. The markets differ greatly, and our support for discovery+ alongside our traditional platform offers a lot of potential outside the U.S. Additionally, we can promote on our platforms and we have a large library. Currently, we are generating substantial free cash flow and growth in our traditional business while maintaining and strengthening our existing relationships. Distributors don't want channel stores to dominate the market, so they are approaching us and expressing that discovery+ is beneficial for everyone involved. We're working collaboratively with mobile and broadband providers. We believe we have an advantage with our presence, as we operate 10 to 12 channels in each country, which increases our scale.

That's great. And if I could, for Gunnar maybe. I want to just maybe take a step back from the quarter and ask about the AOIBDA outlook over the next few years. Obviously, 2020 took a hit with COVID. And this year, we're seeing peak DTC investments as well as Olympics weighing on profitability. Looking ahead, though, the DTC losses ease, Olympics losses get better in 2022 and then in 2023. And of course, hopefully, through all this, we'll hopefully see recovery in linear ad trends in revenue as well. And of course, not expecting specific guidance, but can you just help us think through any high-level puts and takes as we think about what seems like a very favorable setup?

I believe you've made a great point. Those components are indeed crucial. To elaborate, we have refrained from providing very specific guidance related to breakeven. I remain extremely pleased with the performance metrics for discovery+. In December, we shared a target of a 20% margin for the discovery+ business at scale, which now seems very conservative based on current observations. Stepping back, our payment numbers are top-notch in the industry. While I want to be cautious since it's early days, the cohort numbers appear very promising, and we're performing better on ARPU than we initially anticipated. When you combine these three factors, it leads to a customer lifetime value estimate that is considerably better than what we projected in December. Additionally, we're acquiring subscribers at quite efficient costs. The majority of the losses observed this quarter from start-up investments are primarily driven by marketing. We expect some improvement in efficiency as product awareness grows and we benefit from high retention rates among our subscribers. Given this, while it's still premature to discuss a revised margin profile for the next several years, we feel optimistic about it. As we previously mentioned, breakeven isn't a target we manage toward. As long as I can secure subscribers with exceptional lifetime values at a lower cost than those values, we will continue to do so. I also reiterate our stance; I don't think any competitor will achieve the margins we will in this sector. I believe we'll reach breakeven or scaled margins much sooner than anyone else due to our stable economic fundamentals. We're maintaining the same consumer value and content leverage, operating in highly efficient areas where we excel, backed by 30 years of experience. We're also successfully leveraging our content across various platforms globally. It's remarkable to witness the effectiveness of this model, even in these early stages, especially the strong synergy between our TV Everywhere and discovery+ platforms. Consequently, I provided additional KPIs for you to consider and compare with what you're learning from others, as well as to evaluate the model. We'll continue to offer transparency rather than a long-term five-year forecast.

Your next question comes from Alexia Quadrani with JPMorgan. Your line is open.

Can you just please elaborate a little bit more on the demo of the typical consumer and your discovery+? It sounds like you're skewing favorably to where the demo the advertisers are particularly excited about reaching. And I'm wondering if given your outside success in the AdLite option, if you're skewing your promotional activity more toward that option versus the ad-free? And then my second question is just really on the moderation of linear subscriber decline that we've seen, you've got such great insight into the industry. And I'm curious, I know you don't have a crystal ball, but I'm curious if you think what's really been driving it and how sustainable it is.

Sure. It's significantly younger, more than 15 years younger. About half of the people have cable and half do not. The advertisers are engaged, and with such high viewing duration and engagement, we've been doing very well. We consider AdLite a breakout hit, trending well over $10 right now, and it's continuing to grow as we expand. We have a strong demographic for it. When comparing ad-free to AdLite, we've spoken with customers about the four minutes of ads per hour, and they seem very satisfied with both options. However, we don't see a major difference in the ability to generate additional revenue from AdLite. We'll continue to push AdLite, especially as we plan to roll out the ad-free option internationally, which is very affordable. JB and I were quite impressed with the data we saw two months ago, realizing there could be up to 50% more revenue from AdLite. As we scale, this could increase further while ensuring a great customer experience, which surprised us because we initially thought viewers wouldn't want commercials at all. However, they are very content with four minutes of ads rather than pushing for more. We're getting a premium for it, and it's performing exceptionally well, so we're going to continue with this approach.

And Alexia, maybe on your other question regarding the moderation of sub losses in linear, I wouldn't want to comment on the overall industry trend. Just keep in mind, our better number here is very much a Discovery-specific result. It's just we're getting additional carriage in some of the renewals of last year, and that's helped us. And we obviously continue to be among the best distributors across the virtual MVPD space. So those two have been the helpers.

For all of our core services, we have strong protection against being moved around on tiers. Therefore, you should consistently see us at the top due to our agreements. Additionally, they could add our channels to tiers to boost viewership, which we've already observed in some of our newer deals, and as a result, we are likely to perform better.

Your next question comes from Rich Greenfield with Lightshed Partners. Your line is open.

David, I believe that partner plus users are spending three hours per day. Can you hear me?

Yes, now we can. Yes.

So David, you've mentioned several times that the average time spent by discovery+ users is over three hours a day, which is around 50% higher than Netflix and potentially 15 times greater than Peacock's daily usage. I want to clarify whether this figure is based on all 15 million subscribers averaging three hours daily, or if it's just a specific subset of those subscribers. Additionally, I have a question regarding ad sales. In the release, you mentioned the pay-TV universe's reach affecting ad sales. Can you elaborate on whether the declining pay-TV universe is driving more viewers toward discovery+ and digital platforms? What was the reasoning behind that comment, and how do you anticipate this trend will evolve over the next 12 to 24 months?

Thank you, Rich. To clarify, the three hours per day refers to each viewing subscriber, not the average subscriber. You can estimate that around 50% of our subscriber base is active daily. That's how to interpret that figure. You are correct, it is a fantastic statistic across the ecosystem, and we are very excited about it. Regarding the shrinking universe, as I mentioned, we gained market share, both domestically and internationally in the first quarter. However, the viewing trends for the entire pay-TV ecosystem in that quarter have been challenging, with declines in the universe estimates and in television usage.

During the pandemic, we experienced significant growth and were able to produce content, enhancing our market share globally. Although channels like TLC, discovery+, and HGTV do not follow the same cycles as scripted content, we faced challenges in content production. Currently, we are operating at about 90% to 95% capacity and will start releasing more new content. Our growth rate looks different from others because we gained meaningful traction during this time. Despite the delays caused by the pandemic affecting some of our popular shows, we're back to performing at a high level, and you can expect to see more fresh content soon. I believe we will continue to expand our market share and outperform our competitors.

And David, just because as a kind of a big-picture question for you, as you think about where to put content, you're producing lots of it, and you said you're now back to like full capacity. How do you and the team decide what goes digital first to discovery+ versus what goes to the linear networks? And how are you making those decisions? And is it changing already?

We're learning a lot and have a wealth of original content. We can see what works and what types of content our audience prefers. The situation is quite dynamic. Our production values have improved, and we've invested more in star power for discovery+. We're in the process of determining what truly adds value. For example, we haven't showcased Fixer Upper, Chip, and Joanna anywhere except on discovery+, which has significantly helped us. The BBC content will be exclusive to discovery+, and we're currently experimenting with it. We launched a 90-day series that was only available on discovery+, which attracted many subscribers and garnered substantial viewership. Those viewers are also exploring our extensive 90-day library, which features over 150 hours of original content. We're figuring out how to eventually reintroduce some of that content elsewhere. Despite that, we've managed to support our growth. As mentioned by Gunnar, we're experiencing steady and robust growth on discovery+. Our primary focus is on expanding internationally, where JB is leading those efforts. The international landscape presents unique challenges, particularly with local sports. JB, could you elaborate on the international aspect of that balance?

Yes. I think the other unique aspect, as David and Gunnar mentioned earlier, is the cost efficiency of our model for most of our production, which minimizes the either/or scenarios. You have a choice of one option or the other. The exclusivity present in scripted content requires a significant investment, limiting you to either one or the other. We have a balanced and strategic approach; for established franchises and talent associated with our linear brands, we are committed to nurturing those audiences. Additionally, as David pointed out, we are experimenting in various ways to analyze the data. We are trying out some early windows or having talent who typically works on linear projects do additional work for us on DTC. This allows us to do both—continue producing excellent originals for our traditional platforms while offering viewers access to these through larger bundles or discovery+, either simultaneously or with a slight delay in some instances. At the same time, we are investing in unique originals for discovery+ featuring new intellectual properties, fresh faces, new talent, and edgier stories that might traditionally be challenging to produce on linear platforms without exceeding our content budgets. Thus, our distinct content model creates flexibility rather than presenting it as an either/or situation, and we are continuously experimenting with different windows to interpret the data effectively.

The only point I would add is the reason I talked about in my comments about Italy is 80% of that country all of our content is new to them. So as you look across Europe and Latin America, even though we have a very successful pay business, that we have a huge library, having been in these markets locally for 15, 20 years, that we could now go to an offering at a very low price and be available to 80% of the country that didn't have access to us before. So here, how do we window it and how do we move it back and forth is a very different question when you're going into a country that's 20% or 30% penetration. And it's now new to the overwhelming majority of the population. They've heard of it. They've heard of it. They have good feeling about it. But maybe they couldn't afford to buy it or they want it on a different device, but it's a different calculation.

But David, it's also it's most extreme in some of those international territories. But to some extent, we see the same here domestically. As we laid out, we're up for the first time, we're now targeting 30 million homes that don't have a cable subscription. We're getting a significant number of additional viewers in here that are generating revenue at the same or a better ARPU. And that allows us to invest behind us. And that investment over a couple of months or next year maybe is going to raise all boats because we're just creating more of what we're best at, which is our global unencumbered, 100%-owned and high-quality IP.

And your next question comes from Brandon Nispel with Keybank. Your line is open.

Gunnar, could you provide more details about the retention trends you're observing for the customer cohort? Are you seeing retention after the first month to be greater or less than 90%? Further insights on this would be appreciated.

Yes. Look, as I said before, we are very, very encouraged by those retention curves. We are seeing more than 90% retention. We're starting one step earlier, very, very strong roll-to-pay of north of 80% after the seven-day free trial, talking about the U.S. here. And then greater than 90% retention in the first month and then a very, very significant drop-off in sort of cohort churn, so again, it's way too early to talk about sort of a stable long-term churn rate here, but the numbers are off the charts compared with what we expected. And also, frankly, based on the intel that we have been able to pull together here, I think they're also stacking up very, very nicely against competitive offerings. Again, it's early days. I always want to disclaim that, but we could not be happier. And I think it makes sense. If you look at the length of tune that we've always been seeing with our viewership in linear as well, we're essentially seeing the same behaviors here in the DTC world.

Then on long-term churn expectations, where do you think you fall? You said low single digit, but is that 2% to 3%? Or is that more of a 4% number?

Well, as I mentioned, it would be merely speculation at this point. I believe we are going to perform exceptionally well compared to even the top players in the industry.

It's challenging to predict future trends based on just one or two months of data, but looking at the last three months, the numbers are quite strong and we are experiencing low single-digit churn. Even if we notice a downward trend, there is potential for that to improve in the coming months, which would be beneficial for our growth. Currently, all indicators show that our churn rate is much lower than we anticipated, which is a key reason for our confidence. People are clearly satisfied with the product.

And I mean again, what we're looking at right now is really that estimated customer lifetime value up very, very significantly compared with what we put in our initial business case. That was the foundation of what presented in December and how that relates to subscriber acquisition costs. And clearly, if we're looking at our numbers here, I have to wring out a lot of marketing spend in the first quarter. And I was very, very happy to do it because we're just looking at even the revenue contributions over the balance of the year. It's just an amazing return on investment by any measure.

Our last question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Gunnar, I was wondering if you could talk a little bit about how you guys think about the D2C business in the context of the overall business, in other words, do you think about this as a single P&L? Because it's very tempting on our side to hear sort of the $1 billion drag on EBITDA. And the path to breakeven is suggesting some pretty substantial EBITDA growth for the Company over the next several years. And I'm wondering if you can talk a little bit about how you think about managing the business, particularly on the content and marketing front, so our expectations are sort of in the right place, if that makes sense?

The question is very relevant, Ben, because we are currently looking at at least two revenue streams that have distinctly different financial profiles. It might seem straightforward to categorize them as a digital business and a linear business, but that doesn't reflect our current situation, and it may be even less applicable to us than to others due to our strong IP exploitation model. One significant advantage we have is our capacity to leverage multiple opportunities globally and across different platforms. That's why it is challenging to clearly separate our digital and linear financials at this moment. Additionally, this approach doesn't completely align with how we manage the Company, as JV and his team are focusing on international markets in a holistic manner. Some of the trade-off decisions we've discussed concentrate on the interplay between linear and digital. Nonetheless, we will strive to make it easier for you to form your perspective. By outlining the metrics for our discovery+ product, sharing insights on the losses we've faced from its launch, and providing a short-term outlook on how we anticipate those losses will trend, we aim to assist you in your modeling. As I mentioned earlier, I expect these losses to start decreasing somewhat in the second quarter. However, I also want the flexibility to invest more if we identify markets that present a promising opportunity to acquire subscribers at a favorable acquisition cost. We will need some flexibility in this area, but I want to give you a clearer picture of our financial profile. My focus remains on long-term sustainable growth for the company, as I believe it will enhance shareholder value. Looking at our guidance for the second quarter, we see accelerating U.S. distribution revenues growing by 12% despite a tough comparison, double-digit growth in U.S. ad sales, a 50% increase in international ad sales, and significant progression in international distribution growth to mid-single digits. It's early days, but I would say that we are seeing positive developments.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.