Ladies and gentlemen, thank you for standing by, and welcome to the Warner Bros. Discovery, Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Additionally, please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Good morning and welcome to Warner Bros. Discovery's 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 US 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.

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 began 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 loved having the opportunity to get time with the new leaders across WarnerMedia, as well as thousands of employees across key locations in the US. 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 allegiance to 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 subscribers. 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 from each dollar of content spend than our peers and ultimately drive free cash flow. 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, which 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 Brothers films, Warner Brothers Television and HBO, through Global leaders that are producing at scale, through 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 have 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 and the largest domestic and international lifestyle library from Discovery, as well as significant global live sports and news. This strong foundational offering will allow us to invest in scale smartly and more 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 Batman at Warner Bros. Studios and 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. HBO Max, which is on such a roll, is 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. In Europe, there's the Beijing Olympic Games at Discovery; Chip and Jo in the launch of Magnolia, and 90 Day has been 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 two-plus. 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 Four, NBA regular season, and what looks to be a strong playoffs at Turner, 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 of 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 in 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. So in the course of initial planning, integration and synergy capture, early action priority items for me will be the upfront. Like with scripts, 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've 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 Premiere, 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 multi-year 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. By direct to consumer, we'll 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 workstreams. 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 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 of 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.

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 standalone. Discovery's first quarter US 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 the 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. US 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 UK, 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 US. While visibility remains limited in certain key European markets, at this moment we expect Discovery standalone 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 D2C 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 OIBDA. 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 last year were partially offset by higher content costs across our portfolio. Net-net, we finished the quarter with $1.03 billion of OIBDA, 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 we’ll 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. Sticking to the reported numbers for now, underlying performance at HBO Max during Q1 was healthy with growth of 3 million net adds, reflecting continued strength of the programming slate. In total, together with Discovery's 2 million net adds, the pro forma company added 5 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 the prior year to $1.3 billion. Free cash flow was down even more, declining by $2.6 billion versus the prior year and more importantly, significantly negative in absolute terms. Again, this is for WarnerMedia and 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 sight, 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 the positive offsets 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 5 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+ 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 the current baseline and that target will ultimately prove conservative. 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 times to 3 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're digging into early on, as well as some initial financial and operational insights since the 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 platforms. 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 and within each and every business line given the significant overlap geographically and operationally. Lastly, working capital. Since I joined Discovery five years ago, the key focus 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 at 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 take your questions.

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

Good morning. Just wanted to get some perspective, obviously, you’ve made some decisive decisions on the CNN+ shutting down. Are there a lot more opportunities across the Warner Brothers' 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 costs to achieve and fees and so forth, and also the adjustments that came through the transaction with Warner Brothers. I think you paid about $2.5 billion less than the original deal price. Any sense of all the puts and takes you can help us with what the free cash flow trends can be given where you're starting from? Thanks.

Vijay, I'll begin with the last point to clarify. We are still finalizing our opening balance sheet, and there are ongoing adjustments related to working capital that we need to address. I would prefer to discuss the specifics of these results once everything is fully finalized and audited, hopefully in a few weeks. However, I want to highlight that, as we've mentioned, 2022 is expected to be quite complicated. You've identified some of the influencing factors, but if I reflect on the past 15 months for WarnerMedia as a separate unit, we've generated over $40 billion in revenue with almost no free cash flow. Management has chosen to invest a significant portion of incoming funds into various initiatives. For instance, CNN+ is one example, among many sizable investments that seem to lack a strong analytical financial basis and do not meet the return on investment criteria I would prefer for substantial investments. Therefore, this represents an opportunity for us to continue worthwhile initiatives while reallocating some resources or increasing cash reserves, but it's indeed an opportunity. We are actively working through this process. As I mentioned, 2022 appears messier than I had anticipated, but I am more optimistic than ever about 2023, which I believe will be much clearer. Another point that you may have caught from David earlier is that we are not being rigid in our decision-making. Our choices will be guided by the available data and thorough financial analysis, and I see a great deal of potential moving forward.

An example of that is if we're not going to be in a particular country for a period of years, we should be monetizing our content. As we've taken a look at the subscription platform 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 is a huge amount of content and you look at the wealth of the TV library and the Motion Pictures 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 is 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.

Okay. Thanks so much.

Next question.

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

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 had meaningfully shifted given what we're seeing elsewhere in the ecosystem? Thanks.

Thank you very much. I believe that being a fully diversified company gives us a significant advantage as we are the largest producer of content. With popular shows like Ted Lasso and over 100 series in production—more than half of which are for third parties—we are generating substantial revenue as a leading producer. Additionally, our traditional business is performing well and generating significant free cash flow. Moreover, the combination of Discovery and Warner, with our extensive IP portfolio and global reach, presents an even greater opportunity. Looking at the success of Netflix and Disney over the years, they've paved the way, and audiences are becoming accustomed to purchasing and consuming content across various devices. This new combined entity has a unique position in the market with a vast array of compelling IP, including DC, Hanna-Barbera, Looney Tunes, Harry Potter, Game of Thrones, and HBO, which we can leverage alongside Discovery's assets. When I mention discipline, I'm referencing the fact that users spend countless hours on Discovery+. Our content library is nearly as extensive as Netflix's, combined with the unique appeal of HBO Max. The first question we consider is how this sizable and attractive offering will perform. In Europe, our strengths lie in sports, non-fiction, entertainment, and HBO. In the U.S., we boast comprehensive content offerings, often leading with female audiences, and our product experiences low churn. We believe we have a differentiated and appealing variety of IP that resonates with families. Data indicates that increased usage correlates with higher growth and reduced churn. We are excited to pursue our ad-light and subscription service, and amid current market uncertainty, our diversified company positions us well to maintain conviction and discipline while generating significant free cash flow. Having been at Discovery for 15 years, those familiar with us know we prioritize free cash flow. We consistently generated over $3 billion in free cash flow, investing in new media, and learned valuable lessons through that process while still generating nearly $2.5 billion in free cash flow. In contrast, Warner generates $40 billion in revenue but has minimal free cash flow. With their vast library of IP, our focus remains on making investments that yield real returns and support subscriber growth on our platforms. We see a genuine opportunity before us. 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.

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 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.

Thank you very much. In the models we’ve shared, we haven’t included any revenue synergies. It was advantageous that we closed before the upfront presentations, and we now have a scaled product in the market with an ad-light offering. We were early proponents of the ad-light concept, recognizing it as a strong consumer proposition. Our churn rates were very low, and we managed to generate between $5 and $6 in incremental revenue for every two to four minutes of advertising. As our offering scaled, revenue increased. We committed early on to providing consumers with what they want: a lower-priced option with minimal advertising. Additionally, we’re in the advertising business, which is a significant advantage for us. As other companies begin to enter the streaming ad-light arena in the coming years, many will lack the necessary infrastructure, local teams, or capability to package various channels and free-to-air options across Europe alongside that inventory. Moreover, the merger of these two companies creates a strong opportunity, and I’ve been meeting with top agencies recently along with my colleagues Bruce Campbell and Jon Steinlauf to discuss what we can achieve together. We are leaders in live sports, news, entertainment, and lifestyle. Collectively, we surpass any of the broadcasters. When considering the top players in primetime in America, we rank among the top three, and in some metrics, we’re number one. This ability to provide a diverse offering is key since advertisers have varying preferences for sports, entertainment, and news. Specifically for us, all sports rights are secured for the coming years, with notable events like all the playoffs and the Stanley Cup on TNT, the NBA Finals on TNT, baseball on TNT, and March Madness on TNT. We are focused on creating value for advertisers across Europe, effectively reaching every demographic. Even with the NBA playoffs on our radar, the feedback we’ve received from advertisers and agencies has been overwhelmingly positive about the emergence of this new fifth player in primetime, which we believe to be among the top three. This perspective also holds true as we expand our reach beyond the US, presenting more opportunities for advertisers.

Great. Let's take the next question, please.

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

Thank you. I have two questions. Can you discuss how your management team is changing the incentive structure compared to previous owners, especially given the many inefficiencies at the older WarnerMedia? That's my first question. For my second question, I know you've touched on advertising, but could you elaborate on your approach? You mentioned scaling, but you also have a wider range of assets. From what I remember about the old Warner days, news and sports weren't sold alongside entertainment. It seems like this is the first time all these assets will be under one sales team, and you'll have additional platforms to utilize. Are you integrating advertising for direct-to-consumer within this upfront? Could you share more about your strategy? I understand it will reflect in Q4 this year, but is there any chance for opportunities prior to that in scatter? Thank you.

Thanks, Jessica. You're right; our main focus is on how we can provide clients with a simple, one-stop service. We've restructured, and in our meetings with advertising agencies and advertisers, the process has become easier. Previously, we separated sports, Warner Entertainment, and Discovery, but now everything is consolidated. Additionally, we have a wealth of digital inventory in high demand, including Bleacher Report and cnn.com, which is the largest news site in America, along with the ad-light offerings on Discovery+ and HBO Max, and all our other digital assets. This means advertisers can access a wide range of demographics and content from a single source. Steinlauf and Bruce can engage with advertisers to meet their specific needs while offering the largest reach or close proximity in the market, along with an extensive array of diverse content. This positions us advantageously to meet the needs of advertisers. Would you like to add anything?

Yeah. 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, sort of 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 will 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 the individual business units. It's going to evolve over the course of the next 12 months, but that's sort of the high-level philosophy here.

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?

Jessica, as I mentioned, everything I'm sharing is based on what AT&T has publicly disclosed along with some internal management reporting. I don't have a fully audited set of WarnerMedia financials, so I prefer not to discuss any specifics. However, the aggregate operating profit number indicates that it is $500 million lower than what I am currently seeing for the full year compared to what we included in our management case disclosed in the S4.

Just one follow-up that I think it's going to be interesting for next year in terms of sport. It'll 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 rest all the playoffs will be on us and ESPN.

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

Hi. Good morning. I had two if you don't mind. So, first, just wanted to ask you about the timing for the relaunch 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, 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 season 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 is maybe more of a longer-term focus for you? Thank you.

Thank you, Bryan. Regarding the timing for the relaunch, I don't want to make any new commitments at this point. Our team is currently working diligently as a unified group to finalize the details, and we'll update everyone once we have a solid plan in place. In the interim, our mindset remains unchanged. The priority is to unite our products, and simultaneously, we will remain cautious about our spending. We won't be entering any new markets for now or aggressively pursuing subscriber growth until we focus on this key priority of integrating our products. However, I'm very optimistic about the potential of the combined product, especially with exciting content like House of the Dragon coming in the third quarter, which I believe will create a significant global impact. We're feeling confident about this, but we'll continue to approach this merger with careful consideration.

It's essential for us to combine these two products, as the range and diversity of content we offer is recognized worldwide. We believe this will create an incredibly appealing product that we can promote globally. Therefore, while we are eager to launch, it's important that we do it correctly. It's crucial because although Euphoria might attract a record audience, we want to ensure that once viewers finish it, we can recommend additional shows they might enjoy, whether it's Chip and Jo, Oprah, 90 Day Fiance, or another popular HBO Max series. We have significant work to do on the platform itself, but we also see a major opportunity in reducing churn. HBO Max currently experiences a much higher churn rate than we've observed in the past. Being able to effectively manage this churn is a key objective for us, and our experience in Europe over the past eight years shows that addressing churn can lead to substantial growth.

And then, maybe Bryan, on the password sharing point. As you may have heard before, both from us and the HBO Max team that there is a process in place. There is a dedicated team, and I would just say that this is not a rapid 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.

Great. Thank you.

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

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? We all know what an HBO show is like succession, should it be broader? You just mentioned things like 90 Day Fiance, et cetera. 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.

Thanks, Rich. It makes complete sense because you need a variety of content for everyone in the household. People might tune in for Euphoria, but our research indicates that after watching Euphoria, their second favorite show is 90 Day Fiance. This variety of content is why viewers are spending hours on Discovery+, and they engage with it at different times throughout the day. The same viewers who are enjoying Julia or Gilded Age are also watching Big Bang Theory and Friends. This diverse offering is what has allowed HBO Max to grow so rapidly. When you combine all this content together, there's something for kids, teens, and practically everyone in the family, which makes it hard to justify going elsewhere. We have a vast collection of movies and library content available. I truly believe that quality matters. Those at HBO, including Casey and the talented team I've spent a lot of time with recently, have been working together for over 15 years, creating a reliable system similar to Disney's success under Alan Horn and Bob Iger. They consistently outperform the market, especially in Motion Pictures. The emphasis on quality in shows like Julia, Winning Time, Gilded Age, Euphoria, Flight Attendant, and recently launched Barry has positioned them as culturally significant. The current needs of HBO align perfectly with what we offer. After watching Winning Time, viewers can switch to Friends, Big Bang, their favorite movies, or even enjoy some Oprah or TLC shows for fun. Our experience in Europe shows that trying to provide just high-quality niche content isn't enough; you need to combine that with something everyone in the family enjoys to reduce churn. It's much harder to leave a service when various family members are actively using it. This is precisely why we made this deal, and all indicators suggest that it will strengthen us and make us more compelling due to the wide array of quality content we have.

And as you think about that, how does that impact? Obviously, as the 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 turn or Discovery the legacy cable network business? 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?

We have been growing our traditional business. We acknowledge that we have experienced a 4% decrease in subscribers and a drop in viewership on our platform. However, with our competitors frequently removing content, we see an opportunity to enhance our original programming. We are focusing on our original content for CNN, live sports, and shows on food and home across Discovery. This trend is also evident outside the US. In the long run, while the business landscape is tough, advertising rates are on the rise as advertisers continue to seek out effective inventory in long-form video. Historically, broadcast television saw a decline in viewership over 20 years while advertising rates increased. I recall a time at NBC in the mid-'90s when there was skepticism about this trend continuing, and almost 30 years later, advertisers are still willing to pay above the decline threshold. We will focus on efficiencies and effectiveness in our traditional business, which we believe generates significant free cash flow. We will also invest in Warner Brothers Television as we sell content, capitalizing on our strength as a top producer. We are entering bidding wars for our content, which will remain a priority. Additionally, we are building our growth engine with HBO Max and Discovery+ across Europe. Notably, during recent playoffs, we reached over 50% of television viewers across our platforms. As mentioned, substantial amounts of money are being spent to reach audiences, and we now have comparable or even the largest reach on US television. The ability to utilize our own inventory for cross-promotion across all our products, along with the cost savings from this approach, is a significant advantage for us.

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 platforms for a very, very long time, but should have changed for that trend, accelerate and 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.

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 write a lot of checks to others to get the best content because we have the factory.

Thank you very much, guys.

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

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, when you about a lot of your other businesses and content. So I'm just curious how core we should think about CNN within your long-term strategy? Thanks.

Thanks, Steven. First, let me talk about news and CNN. I really appreciate the news business, and we value it highly. CNN leads in global news and stands as the world's best journalistic organization, which is evident in their work. We have a strong new leader in Chris Licht, and we are fully dedicated to this. As we examine news globally, its importance has never been greater. In the US and worldwide, many networks focus on advocacy. The ability to deliver high-quality journalism and facts is fundamental to a civilized society. We need reliable journalism and accurate information to make informed decisions. Advocacy networks can be profitable by generating and catering to audiences, but CNN prioritizes journalism, and that's what we will strive to uphold. Importantly, it is also a very sound business since we own it. Regarding the entertainment sector, whether it involves DC, Harry Potter, or Hanna-Barbera, that's intellectual property we possess. We take a careful approach to sports. The TNT and Warner teams have smartly secured long-term rights that will yield substantial benefits for us. However, sports are temporary, whereas news has the potential to scale. We are already making strides in Europe and aim to expand CNN's global presence more aggressively. The value of that is significant because, every day, people seek entertaining content. Yet, as human beings, we also wake up asking if we are safe and what is happening in the world. Being able to deliver that through a renowned news brand is incredibly valuable. We believe this sets us apart. We are seeing that when we integrate CNN into our subscription platform in Europe, it attracts frequent visits, decreases churn, and enhances appeal. Additionally, cnn.com has become an important media asset. Individuals are accessing news on their devices, and we are the leading source for this, delivering breaking news across all platforms, which establishes a genuine connection. When people encounter CNN on their devices, it resonates with them. Chris will embark on his mission in the next week or two. I'm actively following CNN, we all are, and it is a valuable resource. What Ted Turner envisioned is profoundly significant, and we treat it with the utmost seriousness, especially during significant events like the war in Ukraine. Ultimately, during war trials, the exceptional work of war correspondents, who risk their lives to bring the truth to light through video and photography, will stand out. This aspect likely distinguishes this conflict from others and has probably played a key role in unifying NATO and the international community regarding the situation, thanks to CNN's efforts. We are completely committed to this mission.

Thanks.

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