STOCK BRIEF | WARNER BROS. DISCOVERY (WBD)

Key Callouts

Gunnar Wiedenfels - CFO, Warner Bros. Discovery

• On restructuring, investment priorities, and cost savings

• Wiedenfels spoke to their commitment to continue investments and their identity as a "storytelling" company

• "But I'm incredibly proud of how we got out of the year. I mean, in this tough market environment, we hit our numbers, generated $2.5 billion of cash in the fourth quarter, which has been one of the most important point of this combination, this enormous opportunity from cash generation, short-term and longer-term sustainable growth"

• "Well, we're investing, obviously, mostly on the D2C side and on the studio side. And we're really getting the benefits of some of the tough decisions that we made very early, the last year."

• "I want to actually start with the last one, spending less money. I want to clarify something. I view this as having shaved off that excess. We didn't abandon anything that would have made any sense strategically or financially. And so that is obviously something that I think over time, while we got a lot of criticism, especially in the press at the time, at this point, I think a lot of our peers and others in the industry have kind of made similar decisions. So we haven't abandoned anything that made sense, and we're very committed to continuing to invest"

• "We are managing Warner Bros. Discovery as one company."

• On content distribution

• Wiedenfels asserted that distributing content more broadly - not just on HBO Max - has been a huge benefit to the company

• They reduced streaming losses by over $500M, guided to breakeven in that segment around the first quarter of 2024

• Still maintained there's a lot of work to do

• "I mean we reduced streaming losses by more than 500 million year-over-year and significantly sequentially as well. We guided to, give or take, a breakeven quarter for Q1 of 2024. And it makes perfect sense."

• "And as a matter of fact, one of the things coming out of this conference for me was a bit of a positive notion around the theatrical windows, some of the openings that have worked very well. And we know the value of that, and we're seeing it in our numbers. We're seeing the difference that it makes to open the film in theaters and then getting the benefits on all the downstream windows."

• On revenue opportunities

• WBD vocal about entering the FAST market

• Want to serve all segments for the consumer

• "I think that's true for every streaming service, right? You have an 80-20 rule, right? 20% of the content is driving 80% of the viewership. So this idea of everything has to be exclusive on my platform financially is nonsense. And so we're going to change that. And take all that together, starting from the studio where we have enormous enormously talented creative teams, a library, tent-pole IP, franchises that have been underutilized and undermonetized and then overall the distribution platforms that we have. I have no doubt that we're going to be the best place to get sustained high returns on every dollar of content spend that we make."

• On how distribution models is trending

• Reaffirmed company's commitment to joint distribution, utilizing streaming and theatrical release

• Mentioned the combined HBO Max / Discovery+ product will work to lower churn, raise engagement, and boost revenue

• "Streaming is incredibly important. And I have no doubt that with the combined product that we're launching for the first time, all of this powerful IP on one platform, we're going to see better churn. We're going to see better engagement, and we're going to see a revenue inflection once that's in the market."

• On FCF conversion guidance

• After a year of tough financial decisions Wiedenfels took the chance to affirm long term goals

• "We continue to see a 60% conversion rate long term for the company. I'm very comfortable with the 1/3 to 50% conversion in the short term. And we see EBITDA growth opportunities. We see a more balanced relationship between content amortization and cash spend. We see cost to achieve and integration expenses coming down. We see interest coming down."

• Also spoke about cultural differences the management team is making post-merger to capture value

• "WarnerMedia was never managed with a cash focus. And we're going through a lot of process changes, starting very early in the process, sort of integrating a cash thinking into the original design of contract, templates, et cetera, as opposed to how many people look at it. Cash management is making calls at the end of the year to collect. So there's a lot of opportunity."

• On EBITDA targets

• Wiedenfels said the launch of their combined streaming product is critical to reaching $1B EBITDA goal by 2025

• Every sub they need to migrate from Discovery+ is an opportunity and a risk for the company

• "The April 12 launch event is going to give you a lot more detail on a number of the go-to-market decisions, but that's one of our big, big priorities for this year."

• On Ad-Supported Streaming / advertising

• Advertising monetization is a big source of revenue growth

• They have more inventory coming to the market, Wiedenfels says advertiser interest is there; especially sponsorship opportunities

• The long-term opportunity is getting more scale on the platforms

• "And as you know, both discovery+ and HBO Max have been pretty early in leaning into that advertising opportunity. And we continue to see that work. There's a lot of incremental value coming out of the -- what I would call the ad ARPU on top of the subscription ARPU."

• "We're seeing advertiser interest, specifically in sponsoring opportunities. But it's early days. And again, the big longer-term upside opportunity here is getting more scale on those platforms because that drives better targeting opportunities, better pricing, et cetera. So it definitely is one of the key drivers for us."

• "And then on the monetization side, we're going to continue to be very focused on the value of our inventory. The upfront last year was focused on price. You could argue that, in a way, that hurt us a little bit on the short end as the scatter market went away in the second half of the year. But I have no doubt that we're very, very well positioned for when the market comes back. And we are still under monetizing on the ad sales side."

• On other assets, like CNN and the NBA

• Sports are a very important part of their strategy; other assets are good for defending the revenue base

• They won't do vanity deals; they know what their assets are worth and how much they're willing to pay

• Specifically cited the NBA as one of their strongest relationships

• "We have a great portfolio of rights. And I think we are a very uniquely positioned, very strong partner. And I'm happy with the rights portfolio that we have with the NBA, NHL, NCAA, et cetera."

Please call or e-mail with any questions.

Andrew Freedman, CFA

Managing Director
@HedgeyeComm