Ladies and gentlemen, welcome to the Warner Bros. Discovery First Quarter 2024 Earnings Conference Call. 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 thank you for joining us for Warner Bros. Discovery's Q1 Earnings Call. Joining me today is David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette, CEO and President, Global Streaming and Games. Today's presentation will include forward-looking statements that we made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may include comments regarding the company's future business plans, prospects and financial performance and involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on factors that could affect these expectations, please see the company's filings with the U.S. Securities and Exchange Commission, including, but not limited to, the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. With that, I'd like to turn the call over to David.

Hello, everyone, and thank you for joining us. As we kicked off the new year, our focus was simple: to continue building this company for the future, recognizing that it's not business as usual and that we are transforming ourselves for what's next in an industry undergoing tremendous disruption largely driven by technological innovation impacting consumer behavior. And we're embracing that innovation here at Warner Bros. Discovery with bold and courageous decision-making. To that end, we've had a productive start of the year. We are pleased to see positive momentum building in several critical areas. Most notably, Max is gaining subscriber traction in all regions, adding 2 million subs this quarter with our total Direct-to-Consumer subscriber count nearing the 100 million mark. And while our U.S. subs will be impacted by some seasonality, particularly related to sports in Q2, we're on track for continued robust international growth this quarter and new subscriber highs through the remainder of the year. We're also gaining ground in ad sales with an acceleration in Direct-to-Consumer and sequential improvement in linear this quarter, helped in part by a record March Madness men's basketball tournament and steadier overall ratings. At the same time, we're taking meaningful steps to rebuild our Studios as the cornerstone of our storytelling engine and we're proud of the recent creative successes that have supported our #1 box office share this year, including Wonka, Dune: Part Two, and Godzilla X Kong, and we're excited about the quality and breadth of our future pipeline. We're also leaning into the ways that new technologies like data-driven systems and AI can improve our consumer offerings and enable us to run our businesses more productively and effectively. This is one of our top priorities. Regarding the balance sheet, we continued to see tangible results from our focus on transformation and efficiency. Even in our seasonally weakest free cash flow generation quarter, our free cash flow improved by $1.3 billion year-over-year to roughly $400 million in Q1 and $7.5 billion in trailing 12-month free cash flow. And we will continue to opportunistically manage our capital structure, evidenced by this morning's debt tender announcement. While we've accomplished a lot over the last 2 years, we're still just scratching the surface of our long list of to-dos that we see as catalysts for change, and ultimately, levers of growth for Warner Bros. Discovery. The current media landscape is increasingly dynamic, and in response, we've had to make some tough, and at times, unpopular decisions, but we are doing what we believe is necessary to best position the company for the future. And while transformation success is not easily measured in short-term months or even quarters, we're very confident in the strength of our assets and believe we will see both strategic and financial progress in the quarters ahead. I'll briefly touch on a few key operational milestones and objectives as we look out over the near-term landscape. On Direct-to-Consumer, this is a pivotal and critical year for Max with an aggressive relaunch and rollout underway that will meaningfully expand our global presence and growth potential. Since the start of the year, we've expanded from a single market in the U.S. to 39 countries and territories with the launch of Latin America. And over the next several weeks, we will roll the service out in over 25 additional markets across Europe, including our first new markets, France and Belgium, with more to follow. And we're launching it ahead of the Paris Olympics. Max will be the only place where viewers across Europe will be able to watch every part of the Olympic Games. Our goal in 2024 is to drive top line improvements and build upon the profitability we have achieved last year while positioning ourselves to achieve our $1 billion EBITDA target for 2025 with further growth beyond. And we're off to a strong start with nearly $90 million positive EBITDA generated this quarter despite absorbing some of the launch costs of LatAm. But more importantly, we're laying the critical groundwork and infrastructure from which we expect to build a broader and more profitable Direct-to-Consumer segment. Three key metrics underpin our strategic and financial objectives for Direct-to-Consumer. The first is subscriber growth. As I said, we're nearing the 100 million mark and see strong indicators of continued growth in Q2 and the remainder of the year. We're also leveraging our best practices from the U.S. and LatAm rollouts, such as our strongest content slate yet, more partnerships in place to accelerate our rollout and an enhanced subscriber migration experience that reduces one-time churn and more optimized marketing investment. Second, engagement and monetization. Thanks to a combination of stronger content and product enhancements, engagement reached an all-time high, and we are taking meaningful steps to grow it further. The team continues to improve the product to deliver a more personalized consumer experience, feature set and more impactful content offerings. Additionally, we grew global ARPU by 4% in the quarter. This, in part, reflects a greater mix shift of lower ARPU international subscribers as compared to U.S. subscribers. This quarter, U.S. ARPU grew by a healthy 8%. While we still have lots to do, I am pleased to say the content lineup on Max over the next 12 to 18 months is one of the strongest ever. March was particularly strong with March Madness and Quiet on the Set, a huge hit coming out of our ID networks. And in Q2, we'll benefit from the third season of critically acclaimed series, Hacks; the streaming premiere of Iron Claw and Dune: Part Two; Champions League in LatAm; and the June 16 premiere of season 2 of House of the Dragon, which was one of the most successful series in terms of engagement and subscriber acquisition, just to name a few. In addition to House of the Dragon, over the next 18 months, Max will premiere a robust combination of high-impact global original series, including season 3 of the White Lotus; season 2 of The Last of Us; season 3 of And Just Like That; along with highly anticipated tent-pole original series, including The Penguin; Dune: Prophecy; It: Welcome to Derry; A Night of the Seven Kingdoms, a spin-off of the Game of Thrones franchise, plus an ongoing slate of fresh new Warner Bros. theatrical releases, such as Godzilla X Kong, Furiosa, Beetlejuice, Joker 2 and more. The third metric is churn, which, while still above our longer-term target, continues to trend downwards, and in fact, was at an all-time low in the U.S. at the end of the first quarter. Habitual viewing and diversity of watching are the most correlated inputs to churn, and we saw continued healthy improvements in both in the first quarter. And with our even stronger content lineup coming over the next few quarters as well as our ongoing user experience enhancements, we feel confident about our trajectory. As you know, I have been a big proponent of bundling. And yesterday, together with Disney, we announced a first-of-its-kind offering that gives U.S. consumers the option of an ad-lite or ad-free package that includes Max, Disney+ and Hulu. The product will go live later this summer and we couldn't be more excited. Two of the world's most storied content companies are joining forces to deliver consumers the best and most diverse offering of entertainment at a very attractive price. And in addition to the unprecedented consumer value this product will provide, there's real business benefits as well. The modest overlap between the three services means we have an opportunity to drive incremental subscriber growth. And also because the consumers will have to retain all three, Disney+, Hulu and Max, to take advantage of the price value in the offering, we expect this product will help increase retention and lower churn and thus support higher customer lifetime values. And finally, over time, as the bundle gets more traction, we will benefit from increased efficiencies and greater marketing effectiveness. The bundle will go live later this summer and we're excited about what it could mean for our business going forward. Of course, the heart and soul of our company is storytelling, and we are using all the formidable assets and the greatest creative minds to tell the best stories in the best ways possible as we strive to return the luster to Warner Bros. Pictures. Clearly, this takes time and it's not something that can be accomplished overnight. And the heavy lifting taking place under Mike and Pam's leadership at Warner Bros. Pictures and under Peter and James at DC isn't something that you see fully reflected yet in our financials. However, we are confident it will become more apparent with time. And in fact, we are seeing some strong proof points of our bold, more disciplined approach while we continue working through the remainder of the slate that was in place when we took over the business. Warner Bros. generated more than $1.8 billion in global box office since the start of the year, and it was the first studio this year to reach $1 billion in both overseas and worldwide box office. And they've got a great slate in the works. This morning, I'm excited to announce that the team is now in the early stages of script development for the first of the new Lord of the Rings movies, which we anticipate releasing in 2026 and will explore storylines yet to be told. Peter Jackson and his long-time writing partners, Fran Walsh and Philippa Boyens, are producing and will be involved every step of the way. Lord of the Rings is one of the most successful and revered franchises in history and presents a significant opportunity for our theatrical business. Warner Bros. Discovery's great storytelling IP, including Harry Potter, Lord of the Rings, Superman and many other parts of the DC Universe are largely underused. We are hard at work fixing that. It's a core value and a key advantage for us. We have the characters and stories people love and yearn for everywhere in the world in every language. Unfortunately, the Studio's Q1 financials were overshadowed by the tough comp at games following the great performance of Hogwarts Legacy last year and the disappointing release of Suicide Squad in Q1 in our gaming group. On the advertising front, while total company ad sales were down 7% in the quarter, we continue to see sequential improvement Q2 to date led by what we anticipate will be our biggest Direct-to-Consumer quarter ever. As we highlighted last quarter and underpinning some of this improvement is the resiliency of international linear advertising, primarily from our free-to-air channels in EMEA, which outperformed in the quarter with positive revenue growth. This was primarily driven by robust revenue growth in Poland, Italy, and Germany. These firmly entrenched legacy broadcast assets continue to serve as highly effective platforms for advertisers to reach consumers. And while we just launched our international ad-lite offering in LatAm with EMEA soon to come, these platforms will be critical to enhancing our portfolio offerings. While linear has obvious secular challenges, we continue to see select opportunities. For example, U.S. Networks production hubs can be sourced as popular high ROI content for both linear and streaming. This is a benefit we will pursue where it makes sense, particularly as a more intelligent Max platform helps to inform how we allocate content budgets across specific genres and verticals. For example, Max's hit, Quiet on the Set, which I mentioned earlier, was created by the team at ID, became the most watched title on streaming in its debut week with a massive 1.2 billion minutes of viewing time. The true crime vertical has great traction on Max. And by leveraging the production scale at ID, we will be able to curate additional series very effectively and efficiently that work across Max and our other distribution platforms. I mentioned AI earlier. We recognize that AI is going to have an increasing impact on society and our industry, and we intend to take full advantage to enhance the products and experiences we deliver to consumers and to achieve greater efficiency company-wide. We are focused particularly on improvements to our ad targeting and recommendation algorithms. Our AI-based understanding of our customers and content are being activated in our product, marketing, and ad sales, which you'll hear more about at our next week's Upfront. Since the initial launch of Max, we've been using AI and machine learning to personalize content discovery. We've continuously innovated to improve our models to present the right content in front of our consumers at the right time, and this is helping us to drive better content diversity on Max. We've also been leveraging AI to more efficiently and swiftly identify and optimize ad-break opportunities in our premium HBO content, which typically does not have natural ad breaks. This has enabled us to offer the premium content on our ad-lite tier, and it's also allowed us to create variable ad load for our content as we monetize it using multiple tiers and platforms. And we have dozens of other experiments across a spectrum of areas ranging from corporate and developer efficiency to marketing optimization and targeting. All this experimentation is guided by clearly defined AI principles. We believe strongly the creativity and the kind of empathy and humanity necessary to create world-class storytelling can only be found in people, not systems. We also believe that AI is another in a long line of technology and tools that will enable creators to innovate and evolve how we tell stories and inspire audiences. Before I close, I want to mention a topic I know is top of mind for everyone, and that's the NBA. We've enjoyed a strong partnership with the NBA for almost four decades. We're in continuing conversations with them now and we're hopeful that we'll be able to reach an agreement that makes sense for both sides. We've had a lot of time to prepare for this negotiation and we have strategies in place for the various potential outcomes. However, now is not the time to discuss any of this since we are in active negotiations with the league, and under our current deal with the NBA, we have matching rights that allow us to match third-party offers before the NBA enters into an agreement with them. With that in mind, please understand that this is as much as we're prepared to say about this topic today. These are challenging times for our industry, there's no question. But the reality is, and I tell my team this all the time, there isn't a more exciting moment to be in this business. We continue to do the hard work to transform our company to drive meaningful growth in the future. We are positioning ourselves to take full advantage of opportunities that we see around us. And we're more confident than ever in our assets and our playbook. With that, I'll turn it over to Gunnar and he'll walk you through the financials for the quarter.

Thank you, David, and good morning, everyone. I'd like to begin by spending a minute or two on the balance sheet and highlighting the key factors that underpinned the $1.3 billion positive year-over-year swing in Q1 free cash flow in what is our seasonally weakest cash production quarter and where we typically see more cash outflows than inflows. Namely, number one, the continued benefit from the many initiatives to improve working capital, which we are still in the early innings of realizing. Number two, the more disciplined and analytical approach to content investment and allocation. Number three, meaningfully lower cash restructuring costs. And number four, lower cash interest expense as a result of the more than $6 billion of debt we repaid over the past 12 months. The primary use of our free cash flow remains delevering the balance sheet. We remain committed to our gross leverage target range of 2.5x to 3x, and I'm confident that we will continue to make progress towards further delevering this year. We paid down over $1 billion of debt during the first quarter, including nearly $400 million from open market purchases at a discount. I continue to view our debt stack as an important and valuable resource. Our weighted average maturity is roughly 15 years with very manageable average annual maturities for the foreseeable future with maturities in any given year, significantly less than what our annual free cash flows have been even normalized for the strikes. Our debt is virtually all fixed with an average cost of 4.6%, in line with the yield on comparable U.S. long-dated treasury. Based on the difference of current market value to book value reflecting the current rate environment versus when issued, we have a $6 billion asset in our debt stack. And you should expect that we will begin to be more opportunistic in monetizing this asset as evidenced by the debt tender that we announced this morning. We intend to repurchase outstanding debt using up to $1.75 billion of cash. Turning to the segment results, I'd like to provide some brief commentary to supplement the discussions in the earnings release. Starting with Studios. The $400 million-plus year-over-year decline in Q1 was primarily due to the very tough comp we faced in games against the success of Hogwarts Legacy last year in the first quarter in conjunction with the disappointing Suicide Squad release this past quarter, which we impaired, leading to a $200 million impact to EBITDA during the first quarter. This overshadowed an otherwise very bright spot from the contributions of recently released theatrical films where we have had excellent traction to start the year. I'm excited that we have broken ground on a significant expansion project at our world-class production facility in Leavesden, U.K., a great example of where we are making long-term investments at the heart of our company with an attractive return profile. It's also another example of how our new One WBD processes are supporting the Studio leadership team and combining creative excellence with overall financial discipline. While the Studio business will always be characterized by hits and misses, with these more rigorous processes in place, I have no doubt that we should realize more upside to the bottom line with our hits while reducing the bottom line drag from our misses. Turning to D2C, we have successfully migrated the HBO Max subscriber base in Latin America over the past couple of months. To be clear, this was no easy feat with 160 platform integrations that were required to migrate existing subscribers to the new service. This requires significant management time and resources and we transitioned subscribers with better-than-expected migration-related churn in part attributable to the best practices from the U.S. relaunch. An important outcome for the LatAm relaunch is the ability to now offer more consumer-friendly pricing and packaging across ad-lite, ad-free and premium tiers with more flexibility in subscription options and additional paths to monetize the base. For example, installment billing for consumers who are unable to pay their full multi-month subscription price upfront. We will apply a similar approach to customer segmentation in EMEA. Levers of D2C growth include our significant opportunity to further scale the international subscriber base while improving worldwide monetization. As we push further into this geographic expansion, we are taking a more holistic view of our distribution deals with partners that both distribute our linear content offering as well as wholesale our Max streaming service. Thus far, we have, in many cases, captured greater overall value to WBD while managing the transition from linear to streaming. And with our strong start in Q1, I expect us to remain profitable in the D2C segment during 2024 despite the heavy launch investments, and I remain fully confident in our path to achieve our $1 billion-plus EBITDA target for 2025 and our growth ambitions thereafter. One final note on D2C. Content revenue was down 46% during Q1. And as a reminder, we will have a more difficult comp in Q2, both of which are the product of timing of output deals renewed last year, the availability of content as well as our content utilization choices. Turning now to advertising. We did see sequential improvement, both linear and D2C, in the first quarter. Total company advertising in Q1 was down 7%, a sequential improvement of 300 basis points and was supported by a 70% growth at D2C, which is beginning to scale nicely and where we expect another record quarter in Q2. It also, in part, reflects an increasingly more holistic portfolio approach to monetizing viewership of both linear and Max, supporting our ability to offer our partners incremental reach and more customized ad solutions spanning all platforms, particularly in the U.S. The trend in quarter-to-date linear cash pacings in the U.S. continues to improve modestly even excluding the positive impact of the NCAA Men's Final 4 and the championship game. As a reminder, we will benefit from having these games exclusive to WBD this year, but we do not have the Stanley Cup Finals and the exit of the AT&T SportsNet will continue to be a headwind to revenues with marginal profit impact through the end of Q3. Internationally, EMEA continues to be a standout bright spot, particularly in our free-to-air market. Advertising revenue grew nicely in Q1 and we're seeing a continuation of this trend in Q2. Poland, Italy, and Germany were notable outperformers among the key EMEA markets. In fact, except for the U.K. and the Nordics, advertising revenues were flat to up in virtually all EMEA market during the first quarter. Though materially smaller, Latin America has been and continues to be a different story, particularly given cyclical and secular headwinds in Brazil and Mexico, our two largest markets in the region. And unlike in Europe, where we are a scale broadcaster in several markets, we are more exposed to the less resilient pay-TV ecosystem that is experiencing a more pronounced secular shift of advertising dollars to streaming. With Max now in the region, we have a growing ad-lite presence and are better positioned to capture a share of this migration. We look forward to updating you on our progress here, which, while early, is exceeding our expectations thus far. Finally, I'd like to update you on our continuing transformation efforts where we've made enormous progress on capturing cost efficiency throughout the company over the last few years. We continue to push forward with new initiatives and have added to the pipeline of opportunities. We now see a path to meaningfully exceed the more than $1 billion of remaining cost savings that we had previously guided to, which is on top of the more than $4 billion that we already realized through the end of 2023. I would best characterize these efforts as a continuous improvement mindset, having become muscle memory for the WBD team. We see tangible further benefits from the consolidation of real estate facilities and taking advantage of the great talent across our global capability centers. As well, we see meaningful savings from the ongoing consolidation of one dozen global content workflow systems. As noted, identifying opportunities to utilize AI to increase productivity in all facets of business operations remains a top priority that may drive further upside to our updated cost savings target. I am proud of the continued progress we are making to best position Warner Bros. Discovery to respond to the changes taking place in the industry. Indeed, this demands us making difficult and bold decisions. We are focused on doing what is right for the long-term health and sustainability of the business to best serve the needs of customers and partners while positioning the company to drive long-term shareholder value. Now I'd like to return the call back to the operator, and David, JB, and I will take your questions.

We will take our first question from Bryan Kraft with Deutsche Bank.

I was wondering if you could share any additional details about the bundling relationship with Disney+ and Hulu, for example, pricing, how much marketing will be behind it, and how the two companies are coordinating and funding the marketing activities. And related, how has the Max-Netflix bundle with Verizon performed? And will we continue to see additional domestic bundles created? And how about on the international side, are you doing anything yet outside the U.S.? Or do you plan to?

Thanks, Bryan. The bundle with Netflix is performing better than anticipated with Verizon. This illustrates that working together has more strength, primarily because of the demand for an improved consumer experience, as reflected in our studies and direct conversations with consumers. It proves to be more efficient. The bundle with Disney is unique in that we need to enhance the consumer experience ourselves, creating a more compelling and engaging offering, or else other companies will step in to do it for us. Companies like Roku, Apple, and Amazon are effectively consolidating services to enhance consumer experiences. If we take this initiative ourselves, it could lead to greater efficiency, improved average revenue per user, and a more successful business model. Disney is a remarkable company, celebrating 100 years with us this past year, known for their outstanding content and storytelling. Their global reach aligns well with ours. Collaborating with Disney to offer a bundled service with Disney+, Hulu, and Max is a fantastic proposition that will be attractively priced and available in both ad-lite and ad-free options. For U.S. consumers, this will create a positive experience and presents us with a significant advantage. In the current marketplace, there is a discussion about distribution versus content. I've always believed content will prevail in the long run, which is why we've emphasized creativity within our company by investing in TV and film production and bringing top talent back to Warner Bros. Having a robust library of television and film content will ultimately lead to success. Currently, the marketplace seems to favor strong distribution companies, which are indeed impressive, but I am convinced that both distribution and excellent content providers will emerge victorious. Our ambition to be the premier storytelling company aligns well with Disney's leadership under Bob Iger, making this a tremendous opportunity to deliver exceptional content to consumers in America at a reasonable price.

Yes, Bryan, I would like to add on pricing that, as Dave mentioned, we will provide more specific details later, but you can expect it to be very appealing for consumers. It will be based on the Max stand-alone and the existing Disney+ and Hulu bundle, so it will be competitively priced. Additionally, for us, regarding ARPU, we have a favorable deal for both parties that we are very optimistic about, and we anticipate that the lifetime value of these subscribers will significantly surpass what we currently see. On marketing, we will have substantial support from both sides, including third-party marketing as well as promotion on our platforms for the bundle. Importantly, during the buying process, whether customers are looking for the bundle or just our stand-alone products, our offering will be prominently featured across all buying channels on both Disney's and our platforms. Furthermore, on the international front, this has been a key priority for us, as David highlighted. We have established numerous international partnerships and bundles with telecom, mobile, and broadband providers. As we expand into new markets like France, we have formed major partnerships with companies such as Canal, Free, Orange, SFR, and other leading mobile telco players, which will continue to be part of our strategy. We will also keep exploring partnerships with other programmers and streaming services, which you can expect to see in our upcoming plans.

Yes. And one of the advantages that we're seeing is by having 10 to 12 channels in every country and free-to-air and local content all over the world, we have relationships with all these distributors. And when you saw deals here in the U.S., this innovative deal that Bob and Chris did with Charter and Disney, those are deals outside the U.S. that you'll see replicated or already happening, and you'll see it as we launch, that allow for a real advantage for the fact that we're already in business. A real advantage that not only are we in business, but that consumers are watching our content. And we'll be transitioning a lot of those consumers to watching us through our Max product.

We'll take our next question from Vijay Jayant with Evercore ISI.

This is Kutgun Maral on for Vijay. If I could just follow up on the Disney bundle, maybe a high-level question. If we take a step back, the content companies entered distribution years ago with streaming. And now we're kind of going through this rebundling phase of these services. Between the Disney bundle as well as the separate sports JV you announced a while back with Disney and Fox, you're clearly placing yourself in a key position in this industry transition. So I guess the question is, how does this evolve over the next few years? And what does this mean for industry consolidation and how you look to invest behind your DTC and linear assets?

We have been stating for the past two years that the consumer experience poses a significant challenge. Ultimately, we need to follow consumer preferences. Our approach is to create the best consumer experience, leading consumers to the best content and storytelling available. To achieve this, we are advocating for a direct-to-consumer model without intermediaries. There are excellent companies doing fantastic work as we transition to enhance the consumer experience. The collaboration between us and Disney allows us to connect more directly with consumers, resulting in a stronger business. We gain valuable data and can directly engage with consumers to improve their experience. We are actively doing this with Max. It’s crucial for us to be featured in all major bundles because we aim to reach all consumers. We believe we deserve this opportunity as long as we continue to offer quality content across various genres, including entertainment, nonfiction, sports, and news, as well as in multiple languages.

Yes. Just the only thing I'd add is, look, I think what happened in the 2010s is the industry went down a very dangerous financial path of trying to invest in every type of content in every genre to try and be something for everyone. And at the end of the day, we know where that led us. We're now getting back to all being great at what we do and swim in the lanes that we were great at. Disney, obviously, is incomparable and world leader in kids and family. We are world leaders in premium dramas, scripted drama, comedy, nonfiction verticals. And we can get back to investing and prioritizing our lanes and our key content while they do theirs. And synthetically, these bundles allow us to do that while still providing the consumer with a very attractive price for the combination of products such that they feel like they don't need to anymore do all the switching in and out of services month-to-month, but rather pay and get the advantage of one price. And even if they don't use the service in one month, they still feel like they're getting great value and they might use it the next month. And so it's got a lot of rationale by pulling these together and makes us all be able to go back to investing in the areas that we really are great at.

It does feel like this is a moment in terms of what the next year or two years will bring. I said a while back that this is a generational disruption. I went through a disruption not quite as big as this, but when my career started, when the cable business was getting started, that was a real disruption. And as we look at what happens ahead, there likely will be a restructuring of how people view content and there's a lot of irrationality in the market that's getting shaken out in terms of the amount of money spent. We said early on, it's not how much, it's how good, and that's what we're focusing on. And ultimately, I think the business will look very different in two to three years. And it will be much better for consumers, from our perspective.

We'll take our next question from Jessica Reif Ehrlich with BoA Securities.

Following up on what you just said, David, over the past two years, you've undergone a restructuring while adapting to significant changes in the industry. As you look ahead to the next two years and mention that the industry will undergo further restructuring, what do you anticipate will be the biggest surprises from WBD's perspective? How different will the company be? Additionally, with the Upfront coming up next week, can you share your outlook for both Direct-to-Consumer and linear segments?

Thank you, Jessica. Over the past two years, we focused on what the investment community refers to as synergy. We saw an opportunity to rebuild each business from the ground up, asking ourselves how we would structure these businesses if we were starting fresh, aiming for future success. We applied this approach at Warner Bros. Motion Picture, Disney, DC, Max, HBO, our channel operations, and Warner Bros. Television productions. We made significant changes by eliminating content that we felt wouldn’t benefit us while also bringing in talented creatives and investing in high-quality content. Our goal is two-fold: to operate these businesses efficiently for real free cash flow and growth, and to achieve creative excellence by producing the best content possible. This past year, HBO had its best year ever, and Warner Bros. Television produced some of the highest quality shows. We are also optimistic about our Motion Picture business, which is off to a strong start this year with a lot of exciting content. It’s about combining great content with talented creators and ensuring we are telling the best stories across all platforms while managing the business responsibly to generate real cash flow and EBIT. These elements will drive our future, and it all begins with the quality of our content. Our guiding principle is that the best content will prevail, and we must keep telling the best stories.

Yes. I mean, look, for the Upfront, I think it's a little early. We definitely hope to continue some of the momentum that we've seen last year. I would also say that we're operating in a much more constructive environment this year than we did last year. So hopefully, that will be supportive. To your point, Jessica, about the differentiation between D2C and linear, really, one of the things that's working very well right now is that convergence, the way John and the team take our inventory to the market is fully harmonized. Now it's across platforms incremental reach. We're leaning in further. You've seen some nice growth rates for our D2C inventory. We've got more to take to the market. We're taking it to the market with more data-driven products like the Olli announcement that we made earlier. And so there should be further opportunity. We're just getting started. And look, longer term, there is definitely more opportunity here. We have been very transparent about the significant monetization difference between linear and digital advertising. David talked about AI a couple of minutes ago, certainly, that should be a helper longer term as we think about our go-to-market here. So definitely some upside. And maybe one thing to add to your question about the surprises here, I think if you take a step back and look at our numbers right now, what we just discussed for the first quarter, we have full conviction that our Studio can earn a lot more than it is doing right now. We have full conviction that JB and Casey and the team are on an incredibly successful track. But as we've laid out many, many times before, this doesn't happen overnight, but we're seeing the sausage we're making. We're seeing how we're running the company fundamentally differently that's not reflected in our current and near-term financials. And I think that's going to be the surprise as we come through and show you what the D2C business and our content business can do longer term as we come out of the transformation.

Yes. When you think about the D2C business in the U.S., we need to fix the consumer experience and I think these bundling structures that we've come up with in sports and with Disney will help to do that. But we're a global business. We're in business almost in virtually every country in the world with multiple channels or free-to-air channels and two-thirds of a mature, if the subscription business is gestationally beginning to mature, come from outside the U.S. So when we launch with the Olympics, we're just getting started outside the U.S. So when you look at our subs, this is a big moment for us. And we think we have a real advantage because we have local content in every market. We've got relationships in every market. And this new idea of distributors, particularly in Europe, and as well as Latin America, recognizing they don't want to get left behind and they're starting to talk to us proactively about moving our content onto broadband, how can they offer our products in a way because they don't want to be the antiquated cable operator. They want to be the cable operator and the channel store as well. So all of that, I think, bodes very well for our future. You have to be global. This is not a game for U.S.-only companies. Have to be global, above the globe.

We'll take our next question from David Joyce with Seaport Research Partners.

Following up on the Upfront and advertising question, you have a strong relationship with advertisers and are at the forefront of ad tech. I'm curious about how you align your analytics and data with targeted advertising on linear networks in comparison to what various digital platforms are doing. Is this starting to show results, or when can we expect to see it reflected in some of the modest sequential improvements?

Well, it's certainly beginning to shine through, but I think there's a lot more opportunity. The thing to keep in mind here is we've got to differentiate between the traditional linear and D2C advertising. Obviously, on the D2C platform, we are enjoying all the benefits that everybody else enjoys in terms of being plugged into all the key marketplace platforms and taking advantage of data partnerships in the marketplace. But also on the traditional linear side, it's important to remember that with the shift in the distribution landscape, we've got a much greater share of virtual MVPDs in the mix. That opens up opportunities for us to do targeted advertising with dynamic ad insertion within the linear streams. And those are some areas where we see additional opportunity. And if you take that together with the fact that JB is bringing in more and more ad-lite subscribers, that drives additional scale that not only drives inventory, but also a real scale advantage as we increase our reach across the combined platform. So to answer your question more precisely, I think it's starting to come through, but this is going to be a growth cycle, I think, for many, many years to come.

We'll take our next question from Kannan Venkateshwar with Barclays.

Maybe one on the JV. When you think about the Disney JV with Hulu and Disney+, is there an opportunity maybe to add other services? Does this become kind of an anchor? And are you viewing this long term as an opportunity to maybe bring other services into the fold as well? And is there also a role for some degree of exclusivity in the sense that when you go to market with Disney on a standalone or Max on a stand-alone basis and a bundle, obviously, the price difference has to be attractive enough for consumers to go towards the bundle. So is there any kind of a different approach as you think about what kind of content becomes available across the bundle and individual services? And maybe one on advertising. I mean, your advertising increases or year-over-year change in DTC is now starting to become meaningful enough to offset bigger and bigger portions of the big clients in linear. I think it was about 30% offset this quarter. Is there a point over the course of maybe next year or 1.5 years where you see this becoming a big-enough driver to offset a big part of your linear ad declines?

Thank you, Kannan. Regarding your first question, we believe that the combination of Disney+, Hulu, and Max is extremely strong and appealing. We've observed that many have struggled to determine whether individual companies could invest enough to create something truly valuable for every family member. It's become clear that the costs and the sheer volume of content from a consumer perspective were excessive. Now, we have the opportunity to regroup. When you combine these platforms, you get an exceptional array of kids and family programming, adult content, and both scripted and unscripted shows. We don’t feel the need to include any other service to make it attractive. Looking at the current market, Amazon and Netflix are indeed impressive, offering strong content that many find essential. Consumers are looking for one additional package at a reasonable price, and our bundle along with one or two of those services can meet the entertainment needs of most households effectively. This might increase the challenge for independent services as they may experience higher churn rates, with more users coming and going based on demand. We believe this offering can be a key component of every household's entertainment lineup, and at this time, we don't see a need to expand further.

Yes. I want to emphasize that replacing linear ad sales is more complex than simply noting that as we transition viewership, the $7 billion in linear advertising will move elsewhere. I believe we are entering a lengthy period where both linear and digital advertising will exist side by side. The positive feedback we're receiving from the market and our success in ad sales supports this coexistence. While we are experiencing strong growth in streaming, enhanced by targeted advertising, there is also significant potential for inventory expansion in streaming. Contrary to the belief two years ago that the streaming environment would be ad-free, it's clear that this is not the case, and we are still in the early stages. The number of ad-light subscribers is increasing, but it is starting from a lower base. For example, HBO, which previously had no advertising, is cautiously increasing its ad load and is already seeing substantial results.

We are currently only using a 30-second or 60-second advertising spot. For those who are buying ad-lite, there's likely an expectation for more advertising than that. While it won't reach a significant level, it is possible to extend the duration to 2 or 3 minutes, which would be double or triple our current usage.

And if you look at the combined company, as we said in our prepared remarks, I mean, the combined company advertising trend is still down, obviously, with what we're seeing in linear. But it's gone from down 10% to down 7%, and that's really driven by some of that support we're seeing in the streaming world.

And we will take our final question from Rich Greenfield with LightShed Partners.

I wanted to follow up on the joint venture. You mentioned the buy flows and how this will work with both of you integrating it into those buy flows. What about the marketing? When you walk through JFK, you've likely noticed the extensive Disney-Hulu advertising. Will they be marketing House of the Dragon this summer when it launches? Additionally, when Moana 2 becomes available on Disney+, will Max be promoting the overall content offering, not just your services but also theirs? I'm trying to understand how this will function in practice. Also, it seems that Paramount+ might not be around much longer, and many people are starting to realize this. If that content becomes available, how interested are you in licensing a range of Paramount's sports and entertainment content? Any insights you can share would be appreciated.

Thanks, Rich. Regarding the marketing for the bundle, both parties will continue to clearly promote their offerings. Most of the market spending is focused on content marketing, so each of us will be responsible for marketing our content from our individual companies. These will be linked to the Max service, Disney+ service, or Hulu service. On the performance side, we plan to focus heavily on the bundle, which will be launched with additional promotions throughout the year. My point about the buy flows, Rich, is that even though we are marketing our services or content individually, once customers reach the landing page or the buy flows, the bundle will be prominently displayed, ensuring that it is visible every time they access those buy flows. Whether through Max, Hulu, or Disney+, customers will not miss this offer, and we believe that visibility is crucial for driving not just awareness, but ultimately subscriber growth.

We're continuously seeking high-quality content. We previously structured a deal for South Park, which has been a fantastic addition for us. When we had the chance to acquire NASCAR for the summer, we did so. We also added hockey in recent years, achieving considerable success with it. We have engaged in a movie output deal with A24. Whenever we see an opportunity to acquire content that we believe will enhance our offerings—whether it’s a specific title or a wider range—we're keen to explore those possibilities if they can improve the consumer experience and bolster our portfolio.

And we will take our final question from Steven Cahall with Wells Fargo.

So David and Gunnar, with a continuous improvement mindset, it seems like you have some tools that could help reaccelerate EBITDA. And then I think there's some concern about what you might be willing to do to match on the NBA rights. So I'm just wondering if we can think about these things being tied together, do you think you can find enough cost improvement that strengthens your hand as you think about a more aggressive matching offer to retain some of those rights? And then, David, you said the churn is still above your target and I think this new Disney-Hulu bundle should certainly help that. I think you've also maybe got a bundle that's rolling off towards the end of this year with AT&T. Can you just help us think about some of the churn benefits you get from bundles and then some of the ARPU dilution which usually hits? And on a net-net basis, do you think that these improve the value of DTC earnings over time?

Thanks. Churn is critical; to succeed, you need an excellent product and outstanding content. However, churn can be devastating in this industry. We have been intensely focused on addressing it, recognizing that there isn’t a single solution. Fortunately, we have seen a significant decrease in churn, which we track daily and weekly since launching this business. Our target is to keep it extremely low, ideally around 2, as that indicates a really healthy business, particularly when it's below 3. JB, could you elaborate on our specific initiatives regarding churn? Bundling has proven to be a significant advantage. Many of the deals we're making with partners in Latin America and Europe involve existing distributors with whom we have relationships, leading to effective bundling practices. These users tend to have appealing characteristics, but we must approach this challenge with a strategic mindset.

Yes. Well, I think, Steven, to David's point, the fact that up until we launched in LatAm, our ad-lite offering and SKU was only in the United States for HBO Max. It's a good example of where, as we look to partner with all sorts of distributors across the world, oftentimes you're right, there is pressure to do it at a price point that is more attractive and less costly to the partner. And so launching that SKU across Latin America in a number of markets in Europe not only ultimately helps us go after a new customer segment that's more price sensitive at the lower end of the price points, but also allows us to work with partners who are more price sensitive in those partnerships and find a way to make it more affordable for them to get into business with us while at the same time not seeing ARPU dilution because that SKU and success is our highest ARPU SKU. And so we get the benefits of new distribution from new customers and better partnership opportunities by getting that SKU out into markets and into partnerships with new players. And the LTV, I would say, which is obviously the other metric that we track very closely, our bundled partnerships generally do have some of the highest LTVs we see. And so obviously, we evaluate every deal on its own merits. We make sure that we're making the right trade-offs. But we look at both ARPU and LTV as the core metrics when we think about the values of those partnerships.

This change of working with existing distributors is very significant. These distributors, including cable operators and broadband players across Europe, want to participate in the content opportunities and economics of the new landscape due to the innovative deal Chris made. They aim to maintain their relationships as viewership shifts towards broadband and more modern products. They are beginning to see the opportunity to regain their economic share through broadband offerings. They are motivated to ensure they do not miss out on the revenue generated from the quality content we are transitioning from free-to-air and cable to contemporary app products. Collaborating with broad distributors and their acknowledgment of the advantages of hard bundling, marketing, and reaching younger consumers is a very positive trend for us and the industry.

Steve, concerning the continuous improvement mindset, it's important to take a step back. A significant part of our company and perhaps the entire industry has not been very focused on financial discipline, but we have changed that dramatically. Our management team now has a completely different mindset. This change starts with the creatives who understand that while they need to produce great stories, we are also running a business. We have implemented many different processes, some of which will yield benefits over time. I previously mentioned the content workflow systems; if we were building Warner Bros. Discovery from scratch today, we certainly would not create 12 different content systems or 14 different teams. In 2021, HBO Max faced challenges rolling out the product because their content assets were difficult to manage, as everything was poorly integrated. We are currently addressing those issues. We are still in the process of replacing five different ERP systems as well as 225 financial boundary systems. These changes will provide long-term benefits. It is also crucial to recognize the unified company mentality that was lacking in the Time Warner and WarnerMedia side. Now, everyone is completely focused and aligned. Our linear teams take pride in generating the cash flow necessary to support our investments, delivering content that is valuable whether it works on linear networks or in the direct-to-consumer space.

One company demonstrates a remarkable ability to market on a global scale. This was evident with the releases of Barbie, Wonka, Dune: Part Two, and Godzilla, as well as with House of the Dragon and The Last of Us. When we reintroduce House of the Dragon, every platform worldwide will promote it. It won't just be advertisements; our entire talent roster will discuss what's upcoming on Max. This strategy has garnered significant attention and recognition in the industry, showing that if great content is created, the Warner Bros. Discovery team will support it globally. People will be aware of its release, generating substantial excitement for any outstanding content. I believe this is becoming a defining characteristic of our company: the ability to market globally like no other.

And even in our growth business under JB and Casey, we're still focused on this. There's a difference between an investment and an expense. And it is not a coincidence that we're leading in terms of profitability while we're getting ready to significantly accelerate our growth over the next couple of years.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time. Goodbye.