華納兄弟探索 (WBD) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Discovery, Inc.

First Quarter 2021 Earnings Conference Call.

(Operator Instructions)

Also, please be advised that today's conference is being recorded.

I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy.

Sir, you may begin.

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Everyone.

Thank you for joining us for Discovery's Q1 earnings call.

Joining me today are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette, President and CEO, Discovery Networks International.

You should have received a copy of our earnings release.

But if not, feel free to access it on our website at www.corporate.discovery.com.

On today's call, we will begin with some opening comments from David and Gunnar, and then we'll open the call to take questions.

Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations.

In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.

For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2020, and our subsequent filings made with the U.S. Securities and Exchange Commission.

And with that, I'd like to turn the call over to David.

Good morning, everyone, and thank you for joining us today to review both our Q1 performance and the meaningful progress we are making since our launch of discovery+.

Across our operating segments, brands and global markets, I couldn't be prouder of how our company has executed, near flawlessly, responding with creativity, precision and focus across the board while, at the same time, accelerating the pace of innovation throughout our organization as we embrace substantial growth opportunities around the globe.

We continue to reposition the company and put it on a path of sustainable growth for the long term.

Our ability to generate free cash flow is crucial, allowing us to fully fund our pivot and underscoring the efficiency of our model.

Indeed, even during this moment of increased investment, as clearly evidenced in our financials this quarter, our free cash flow machine is working harder than ever, and it is reinforcing an evolving narrative about Discovery's differentiated hand.

With the strong global launch of discovery+, we are now scaling a very well-received global direct-to-consumer offering that complements our incumbent linear channel presence in every television market around the globe.

In Q1, Discovery had the most watched domestic pay-TV portfolio.

Internationally, we enjoyed an impressive seventh consecutive quarter of linear share growth, anchored by our 27th straight month of growth in our female genres and best-ever quarterly performances in several markets, including the U.K., France and Germany.

This growth was supported by the continued global expansion of our Scripps lifestyle brand and content.

We achieved this while simultaneously launching and building discovery+.

Our continued strategic focus leverages Discovery's powerful competitive advantages, well-established consumer connections in every market in the world, vast local language IP ownership, deep and expanding distribution relationships and a super efficient content production model to power both our global direct-to-consumer expansion and our core linear business.

To achieve this, we are investing more than ever before in our content across the board to support these platforms.

So far in 2021, it is all coalescing and exceeding all of our early benchmarks across almost every KPI.

We are pleased to report that just 4 months into our U.S. launch of discovery+ and with the vast majority of our international expansion still ahead of us, we have 15 million total paying subs across our global direct-to-consumer base.

And we continue to move forward with strong momentum.

When I think about our 15 million direct-to-consumer paying subscribers that we have today and the fact that we were able to add 10 million paying subscribers since the end of last year, we're just really impressed with our traction.

At the end of Q1, we crossed 13 million paying global net subscribers, representing sub growth that compares quite favorably to our peers over the same period, underscoring the value, appeal and stickiness of our content, all of which supported our conviction about our opportunity ahead.

But our sub count tells only part of the story.

We are equally encouraged by early metrics and KPIs across engagement, churn and monetization and ARPU, particularly in the U.S., which likely place us at the very top of an impressive list of peer offerings, many of whom have had a far longer runway thus far than we have.

Roll-to-pay has been between 80% and 85% of pre-trial subs.

Engagement is approximately 3 hours per day per viewing subscriber and well ahead of linear.

The retention is strong, giving us confidence that while early, monthly churn is trending towards low single digits.

Consumers clearly love the discovery+ product.

We see that on social, in the App Store product ratings and the feedback from partners, clients and talent in the marketplace.

Our App Store ratings rank as among the sector's top.

Our Apple App Store rating is 4.9 and based on a very large number of reviews.

Our strong early KPIs are driving exceptional monetization.

Our $4.99 AdLite product, with only 4 minutes of commercial time, generated over $10 of ARPU in the quarter, already well ahead of our longer-term goal.

And it's still trending up.

Our overall blended U.S. ARPU of around $7 is already in line with what we generate in linear, and we see healthy momentum for that figure to grow during the course of this year.

And on a global blended basis, we are seeing ARPU of over $5.

Gunnar will provide some additional detail on metrics and KPIs.

But in short, we are working towards a substantive customer lifetime value, particularly as contrasted against the cost to gain a subscriber, encouraging us to lean in from an investment standpoint when it comes to marketing, content and technological capability in order to maximize this meaningful growth opportunity.

We have an extremely focused approach on all the ways we can be available to the broader swath of users while driving a rich and dynamic user experience.

A cornerstone of this will be expanding our partnerships with many of the world's leading distributors and platforms.

We recently launched on Comcast Xfinity Flex and soon on X1 and are deepening our relationship with Amazon around the globe with availability on Prime Video Channels in the United States and a global rollout plan for other PVC markets.

Now let's look at Italy.

It's a great example of a market where we see encouraging early signs of the long-term growth potential against which we are executing our strategy, bringing together our market expertise, strong local talent, sticky original content, management resources and relationships, production and technology infrastructure and popular brand and channel presence.

Like a number of other markets in Europe, Italy is relatively underpenetrated with respect to pay-TV at roughly 20% with really one main distributor.

It has significant mobile penetration and usage and where Discovery enjoys a healthy pay and free-to-air presence with depth and local in-language content.

And though we have grown our audience share, the existing pay-TV market structure limits the upside from this segment of the ecosystem.

The launch of discovery+ has catalyzed a new growth trajectory.

Our addressable market has grown more than 10x from pay-TV to now include mobile and broadband.

discovery+ enables an entry cost for premium video that's 75%-plus more affordable than traditional bundles.

And discovery+ ARPU are already more than 3x greater in our wholesale portfolio.

This is a powerful combination of potential universe and price growth.

What we are seeing in Italy guides our thinking on the prospects of what our other international markets could look like.

There are significant markets, such as Brazil, Germany and Australia, with similar characteristics and where our ability to offer a direct-to-consumer offering packaged with mobile or multi-platform operators should ultimately result in new customers, higher ARPUs and a deeper, direct connection with our

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Of equal importance is the balance we have been able to strike across our linear and direct-to-consumer businesses.

Reflecting on our Q1 performance, which, by many measures, is still facing COVID-related headwinds, I'm proud of our team's ability to manage through difficult operating circumstances.

And you will see that in our Q2 outlook.

Gunnar will take you through the details, but I'm pleased to note that in every international region, we're seeing positive advertising growth versus 2020 with record shares in Q1 from major markets like U.K., France and Germany.

We are seeing the great resilience in our advertising business not just internationally but also domestically.

This, taken together with very strong scatter pricing in the U.S. and public spending across the globe, give us confidence in our advertising outlook for the balance of the year, especially with the growing discovery+ opportunity.

We couldn't be more excited to present to our advertisers at this year's upfronts on May 18, at a time when our brands and programming have never been stronger or more relevant.

At the same time, growth in both domestic and international distribution revenues will be boosted by discovery+.

Net-net, we see a healthy inflection in our revenue trajectory behind the global backdrop of improving underlying advertiser demand and continued share gains, particularly in our international markets.

Taking a step back and assessing where we are as a company, I'm extraordinarily optimistic.

We've gotten off to a great start with discovery+, exceeding our expectations (inaudible) and are effectively managing through a dynamic, fluid and exciting a time as I have ever seen in my many years in the media business.

We are encouraged by the engagement and reception to discovery+ from our consumers, advertisers and distribution partners around the globe, underscoring the strength of our differentiated hand.

This is an early tailwind that gives us great confidence as we lean even harder into our pivot.

Yet, as important as discovery+'s success is to the future prospects of the company, of equivalent importance is our core linear business, the foundation of the company and backbone of our strong free cash flow.

As we drive (inaudible) long-term, sustainable growth, it is imperative that we nurture both sides of the company as interconnected and supportive to one another.

Thank you, and I'd like to turn the call over to Gunnar, after which JB, Gunnar and I will take your questions.

Thanks so much.

Thank you, David, and good morning, everyone.

My aim this morning is to provide a slightly more detailed peek into the operating model as well as our near-term outlook than what we'd more normally do in large part given the recent volatility.

To the extent that this has created additional questions and/or concerns, my goal would be to help alleviate as much about it as possible this morning.

2021 is off to a great start.

As David just mentioned and which I'll provide a little more context around, our KPIs, particularly in the U.S., where we launched at the beginning of this year, across engagement, monetization and churn and implied customer lifetime value continue to reinforce our belief that prioritizing investment in discovery+ will generate superior returns on capital.

As noted, engagement is truly stellar with viewing subs watching roughly 3 hours of content per day, well ahead of linear, and nationally an underlying contributor to both retention and monetization.

And retention is indeed looking very encouraging with churn coming in quite a bit lower than we had initially anticipated.

While it is still too early to evaluate a stable monthly churn rate, the retention curves of our first subscriber cohorts are looking very encouraging.

Based on these early observations, we expect churn to trend towards low single digits over the course of the next 12 months.

Turning to monetization, which is also well ahead of plan.

Blended ARPU for discovery+ in the U.S. is already in line with our $7 linear (inaudible) owing to the strong monetization of the AdLite product where ARPU has already exceeded $10 in the first quarter.

Clearly, strong engagement and watch time, despite offering only a 4-minute ad load, are lending themselves to healthy advertiser demand and, in turn, exceptional CPMs.

Still early days, though we see a notable path for further monetization as we continue to scale and drive additional engagement, attract additional advertisers and brands and roll out new advertising products.

Global ARPU is over $5 already, with international ARPU, as expected, below that of the the U.S. This is in part due to market price points and in part because we are launching with the greater share of our subscribers coming through promotional partnerships, which drive faster adoption and marketing efficiency but also come at an initially lower ARPU.

That being said, we are, in virtually all cases, seeing ARPUs that are multiples with that of the existing wholesale linear pay-TV [feeds] at which we currently monetize (inaudible).

This, of course, is a core tenet of our international discovery+ strategy and a great objective testament to the quality and value of our content in a marketplace not limited by the boundaries of a traditional pay-TV ecosystem.

Taking these metrics together, we are modeling a much more substantive estimate of customer lifetime value, while subscriber acquisition cost is currently running at a very healthy cushion to that (inaudible).

Based on these trends, we're increasingly more confident with our outer year projections and our target margin profile of 20% at scale.

While it's still too early to formally update this number, we believe there is meaningful upside to the target based on all these initial indicators trending above our business case assumptions.

During the first quarter, next-generation revenues increased 52% year-over-year.

And we look to build upon this momentum in Q2 with next-generation revenues set to more than double yearly driven by both volume of subs and monetization efforts.

We did invest heavily in marketing spend in the first quarter to support the U.S. launch of discovery+ and rebranding and [deep-playing] in key international markets, a sizable portion of which was dedicated to upper-funnel brand marketing to build awareness as well as bottom-up the funnel performance marketing.

This accounted for the vast majority of the year-over-year increase in OpEx alongside content and tech spend.

In the aggregate, next-gen OIBDA losses were roughly $400 million in the first quarter.

We expect a modest sequential improvement in next-gen losses in Q2 as continued substantial marketing efforts to roll out additional territories and requisite content and tech spend will begin to be offset by more material revenue contributions.

Also, we expect to better optimize and refine marketing spend as we gain additional insights.

Quarter-to-quarter losses and quite possibly what ultimately falls into 2021 versus 2022 is still subject to a number of moving pieces.

And we will obviously provide as much transparency as possible ahead of such movements, particularly as impacted by rollout plans around the Olympic Games, planned technology spend and platform integrations as determined by specific partners.

That said, we continue to remain confident that 2021 will represent the peak year for losses from our investment initiatives.

Of course, we are as mindful as ever about the magnitude of these expenses and their impact on our financials.

Yet, we are reassured by the compelling return metrics against this spend.

Now turning to the segments.

In the U.S., advertising finished down 4% during the first quarter in large part due to universe estimates and sub level declines, which ultimately translated into lower impressions across the industry and our networks.

That said, we continued to outperform our pay-TV network peers on share during the quarter.

Moreover, pricing remained robust, scatter CPMs developing strongly during Q1 and expected to be up around 30% year-over-year with roughly 50% premium versus upfront in Q2.

In fact, total dollar volume for Q2 scatter will be up considerably versus last year as we see categories, such as auto and travel, coming back as well as from the influx of B2C companies, including many new TV advertisers.

discovery+ had started

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to advertising revenue in Q1 as subscribers grew throughout the quarter, and we expect an increasing tailwind from this component through Q2.

As such, we expect U.S. advertising revenue to grow in the low double-digit range in the future, helped in part by COVID comps, strong pricing and advertiser demand across the pay-TV business.

U.S. distribution revenues were up 12% during the quarter, at the high end of our expectations.

Mid-single-digit linear distribution revenue growth continued to be supported by contractual affiliate fee increases, partially offset by pay-TV subscriber decline.

Subscribers to our fully distributed linear networks declined by 2%, while our total pay-TV subscribers declined by 4%, likely top-of-peer performance, helped by additional network carriage (inaudible) affiliate renewals and continuing share gains at virtual MVPDs where we remain very well canvassed across all key platforms.

In addition to our healthy traditional affiliate business, the launch of discovery+ and the subsequent ramp-up of subscribers accounted for much of the sequential acceleration in distribution revenue growth.

During Q2, we expect reported distribution revenue growth will accelerate further, even against a much tougher comparison given the significant onetime benefit recognized last year, implying a significant acceleration on an underlying basis, supported by similar drivers as in Q1.

Turning to international networks, which I will discuss, as always, on a constant currency basis.

Advertising grew 8% during the first quarter as all international regions, EMEA, LatAm and APAC, returned to growth, a first since the start of the COVID pandemic.

Latin America developed positively driven by Brazil and Mexico.

And despite intermittent lockdowns in certain EMEA markets, we saw mid-single-digit growth across the region due to continuing share gains in key markets like the U.K., Spain and France.

Finally, APAC was also up significantly during the quarter.

In Q2, as we comped the substantial declines faced by the advertising industry last year during the initial stages of the COVID pandemic, we expect international advertising revenue growth to exceed 50%.

International distribution revenue was down 2% in Q1 due to lower linear pricing in certain European markets, partially offset by our growing discovery+ subscriber base.

We expect international distribution revenue to accelerate to mid-single-digit growth during the second quarter driven by the same factors.

As we called out in prior quarters, as we repositioned a number of key international distribution partnerships towards a hybrid-type structure, we've opted to trade nearer-term upside on the linear portfolio for greater

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in terms of [support] for our D2C efforts.

Segment performance has already reflected some of the impact of this over the last 2 quarters.

Turning to the expense side.

Total operating expenses for the consolidated company were up 21% during the quarter.

Cost of revenues were up 2% largely due to the continued ramp in content investment to support our next-generation initiatives and the timing of sports content in Europe, partially offset by more efficient content spend limits.

SG&A increased 48% to reflect marketing and branding as well as personnel and technology spend to support our next-generation initiatives.

As we guided previously, we continue to target low to mid-single-digit percentage reduction in our core linear business offerings.

Turning to free cash flow.

We produced Q1 free cash flow of $179 million with an AOIBDA-to-free cash flow conversion rate similar to the prior year quarter.

We remain confident and reassured in our ability to financially support all of our strategic endeavors as we continue to convert AOIBDA at a highly efficient rate despite the initially significant ramp in our investments.

We did not buy back any shares during the quarter.

As I noted earlier, we continue to view investments in discovery+ as the best fundamental use of our free cash flow in order to drive sustainable growth and shareholder value.

Further, for the next few quarters, we also want to maintain an appropriate amount of financial cushion since the cadence of our global discovery+ rollout remains fluid, both in terms of where and when we launch and the level of investment required to penetrate specific markets.

And while we are investing against a rigorous financial framework, bear in mind that we're gearing up for 2 sets of Olympic Games this summer and in Q1 next year, both of which will be tent-pole events for the marketing of our D2C and linear brand.

We will, of course, continue to update you on our views on capital allocation as we proceed.

We

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quarter at approximately 3.5x net leverage and, needless to say, remain fully committed to our investment-grade rating.

Turning to a couple of housekeeping items.

Number one, as you may have noticed, we are no longer disclosing adjusted EPS as AOIBDA and free cash flow continue to be the key financial metrics in evaluating our operating performance.

I will, however, provide you with the PPA impact each quarter as well as point out key noteworthy items to help calculate an adjusted EPS number to the extent helpful.

For the first quarter, PPA was $0.32 per share.

Number two, we expect FX to have roughly a positive $40 million year-over-year impact on revenues and around a negative $25 million year-over-year impact in AOIBDA in 2021, reflecting the strengthening of the dollar and sterling since the start of the year.

We are operating on strong footing, evidenced by a rapidly growing direct-to-consumer business and the resilient core linear business.

And our ability to convert AOIBDA to free cash flow where I continue to see at least 50% this year has never been more valuable given reinvestment demands.

We have a self-funded business aimed at supporting an immense global direct-to-consumer opportunity.

We couldn't be more excited as a management team to focus on continuing to deliver solid operating performance while we build the framework to support long-term, sustainable growth and shareholder value.

I'd like to turn it over to the operator to start taking questions.

(Operator Instructions) Your first question comes Robert Fishman with MoffettNathanson.

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Full year core U.S. affiliate fee growth after excluding next-gen revenues for the full year?

And then more broadly, have you seen any pushback from launching discovery+ in domestic affiliate fee negotiations?

And maybe if you can talk to whether the launch of discovery+ on Xfinity should be viewed as incremental or cannibalistic to your overall partnership with Comcast.

Okay.

So let me take -- let me start with that last question.

The -- we're super excited about the upcoming launches here.

As you have seen in our numbers, if you do the math, we've been adding about 1.5 million subscribers on a monthly basis over the past 2 months here.

And I do want to point out that these numbers are going to be moving around a little, but the Comcast launch is going to be one very positive event.

And to answer your question, I do think there is a significant incremental impact.

That's what we've seen with other deals coming online after launch.

So that should be a positive.

And we also look at other events happening internationally over the next couple of months that are -- that could further support the subscriber growth here, most importantly, obviously, the Olympics coming in internationally.

And so that's for the subscriber trend here.

To your other question on the U.S. affiliate side, again, as I just laid out, we're super happy with what we're seeing for distribution across the entire ecosystem here, clearly seeing very healthy and accelerating the contributions from discovery+ and our D2C efforts overall.

But we're also looking at a very healthy underlying trend in the core business.

You saw the linear subscriber numbers, which have again been a little better than maybe over the average of the past 18 months or so, with only 2% down in our -- for our core networks.

And as I said, we've continued to enjoy roughly mid-single-digit growth here in the linear part of the ecosystem, yes.

The -- your question about renewals and impact of discovery+, look, as I said, we are continuing to get fee increases.

That's one of the reasons we have been able to continue the growth that we have delivered in the fourth quarter, now in the first quarter.

And we have been seeing very positive discussions for the past renewals and for upcoming renewals as well.

As you have heard, clearly, discovery+ is an argument in those discussions, but it's one of many.

And to me, it comes back to just the rationale, cool look at what the economics are, and we are delivering close to 20% of viewership for our affiliates.

We're a great partner.

We're leaning in with investments.

This company is investing as much in content as never before this year.

And we're doing that, and we're making that available to our affiliates at a very, very competitive rate.

And so again, I don't want to make any predictions here on individual renewals, but those are constructive discussions, and we feel that we're in a very good position.

The only thing I would add to that is outside the U.S., we've been doing real partnership arrangements, whether it be Vodafone or Sky, where it's seen as a real positive.

And the fact that Comcast -- Brian is a great operator.

He's launched us on Flex.

We're now going to be launching on X1.

So we really -- effectively, we have 2 sides of a terrific partnership.

They're getting value in -- and we're talking to a number of other distributors that we'll be following on.

But it's not cannibalistic at all with Comcast.

They're able to create value for us and for them by -- and I think they have some real entitlement.

They're a broadband leader.

And these channel stores have really developed.

And Comcast is looking.

And between Flex and X1, it could be a real generator of value for both of us.

And as Gunnar said, the share of our traditional channels are going up.

They're selling those channels.

The cost of those channels are very low, and we're probably the best actor in that space in that we're providing the core value of the bundle.

And we have renewed some deals since we launched discovery+, and we've done very well.

And I just realized I forgot to answer part of the question.

We're not giving a full year affiliate growth outlook here for all the known reasons.

But what I did say a little earlier is the -- some color on the second quarter, and let me maybe elaborate on that.

So again, we delivered 12% in Q1, and I expect an acceleration off of this number.

I'm not getting more specific here because, to some extent, it is going to depend on the cadence of subscriber additions on the D2C side because, as I said, that's flowing through now very significantly on the revenue side.

But if you keep in mind, last year in Q2, we had a very sizable one-off item.

So that's going to work against us here.

And when I say acceleration from the 12%, I mean despite that one-off.

So on an underlying basis, we'll see.

This may be an underlying high single-digit growth quarter, which is going to come through as a -- sorry, high teens, high-teens growth quarter, which is going to come through as an acceleration against the 12%, yes.

Your next question comes from Doug Mitchelson with Crédit Suisse.

Kind of hard to -- the Olympic questions here.

I think, David, first for you.

How are you balancing content on GO versus discovery+?

How are you -- and versus the linear networks?

And any change in content strategy from what you've seen so far in terms of what people are consuming on discovery+?

I think that's sort of number one.

I think number two, upfront looks like up 15% to 20% for CPMs year-over-year.

It's early.

We've got a ways to go, but the setup looks very, very strong.

Any thoughts for Discovery and comments on that?

And if I could tag on; I have a quick one.

Ad load at 4 minutes.

When does that start increasing?

Or do you just leave it at 4 minutes because it's good or not?

Thanks, Doug.

On the upfront, look, I don't know that I've seen 50% increases in CPMs off of a prior year upfront before.

The CPMs are very high.

But what we really have an advantage of is that the broadcasters have been getting $60-plus, and we've been getting less than half that.

And now, all of a sudden, instead of (inaudible), we're booking a -- we're really making progress in booking significant dollars in the $40s, high $40s, even $50.

And part of that has to do with the fact that our share is going up.

We have some hit shows, whether it be mail on Discovery or whether it be shows like 90 Day Fiance, which is the #1 show on television, and we've started to get paid a lot more money for that.

And so I think you will see the -- our CPMs, I think, meaningfully better because we have a lot of headroom still to drive our CPM versus competitors that are -- that have been at a very high level.

So I think we hit this upfront at a very good moment.

In addition, we have now some scale inventory on discovery+ which is selling very well.

And in the -- in that environment then on GO, we don't have the disadvantage of -- it's a -- a viewer is a viewer.

So we don't have that inherent disadvantage versus the broadcasters.

So we're getting paid on every sub.

And we also have a very good demographic which is generating dramatically higher CPMs than we're seeing in traditional.

So overall, I think the advertising market, very, very strong.

Upfront coming up, feeling good about it.

In terms of balancing, the idea that we have viewing subs on discovery+ spending over 3 hours and that we have the highest ratings and that our churn is extremely low is telling us a lot about the quality of this product.

But what's really interesting is that the top shows, our top original shows and top shows from our channels, are only generating about 10% of the viewership.

We have a very long-tail library about the size of Netflix, and people are spending a lot of time with it.

And a lot of times -- so we don't have like the one -- we don't have the one-hit show or the one-hit movie.

But I think as a result of that, we're seeing much lower churn than our peers' and usage that is a lot more, and that's generating real economics for us on the advertising side, which has surprised us, the kind of economics that we're getting.

We will continue to experiment with how we move IP around.

We have a lot of originals now on discovery+, and we have more coming.

And we'll be doing that globally, in addition to the local content that we have outside the U.S.

JB, maybe you could speak to the balance as we look outside the U.S. for discovery+.

Yes.

I mean look, we are continuing to obviously -- with all our great local content, and we've said it from the beginning, our power outside the U.S. is this combination of great local IP with the universal stories that come from the U.S. pipeline.

And so we're continuing to lean into that.

We are seeing, obviously, a lot of that great content.

People -- and the success we've had to date in the markets, knowing that, obviously, since we launched and started talking about discovery+'s success over the last few months, we've launched in no really new additional markets in the markets we already had.

So all that is still to come.

And in the markets we already have, with the growth we've seen, it's all been an exploitation of the content we are investing in, windowing, in some cases, earlier on discovery+, and then getting a sort of second fun later on either a free-to-air or our pay nets, and in some cases, obviously, some content exclusively on discovery+.

And that combination of content mix is working extremely well for us.

And it's one that we're continuing to look at the data and the response of the consumer and continuing to modify and adjust as necessary.

The only other thing I'd say, Dave, to the question also about the 4 minutes of advertising, we obviously market the service as 5. And so we came out with a lower ad load than even what we marketed.

We're going to continue to stay at that level for now, but that actually, over time, when we think it's appropriate, which we don't have any plans to do that for the minute, but down the road, we obviously have some flexibility to move above the 4 minutes if we need.

And Doug, maybe if I can just add to that.

It's an upside.

But right now, I mean, the trends are so overwhelmingly positive.

I mean we have so much opportunity without having to fiddle with the consumer experience here, right?

As we said, we're already tracking north of $10 ARPU for that headline product.

And as you would imagine, there's been a positive trend over the course of the quarter as we have sort of fired up the subscriber base and attracted more advertisers into the product.

So there is an underlying positive dynamic.

But if you just take a step back here, why are we saw excited about this?

Number one, we're -- we've ceased to just sell a commercial demo.

It's a big difference between the linear TV and our digital platform here.

We're selling every single eyeball on discovery+ and TV Everywhere for that matter.

Number two is we've got a really level playing field here.

That big gap between broadcasters and cable CPMs that we've been discussing for and seen for decades here just doesn't exist.

It's premium online video, and we're getting full value for our product.

Not only that, we have a highly engaged audience.

You heard some of the stats that we mentioned that are probably top of the industry.

Very family-friendly content environment.

Couple that with the fact that premium online video inventory is scarce in the first place because a lot of the viewership is happening on ad-free platforms.

That drives super high demand and a hot market environment right now.

The other thing that I want to make -- the other point I want to make here in terms of upside is we're still in the early innings from the perspective of our product offering towards advertisers, right?

We have just launched our [Binge] advertising product, pause ads.

We're working on more.

And it's -- in a way, it's part of the prioritization exercise here to get all those features online, but there are a couple of great other ideas.

So I do think that we will -- without even playing with the number of minutes here, we will have a pretty positive run rate here for ARPU over the next couple of months.

And our next question comes from Kutgun Maral with RBC Capital Markets.

Two, if I could.

First, on the international pay-TV ecosystem, one of your peers recently announced plans to shutter a number of its networks across parts of Asia to focus even more on DTC.

On your end, can you refresh us on what linear TV -- pay-TV subscriber trends you're seeing across your larger international markets?

And ultimately, your comfort level in the sustainability of those trends compared to perhaps maybe more drastically pivoting towards streaming.

And then I have a follow-up.

On the international question, in terms of the pay-TV universe, we're continuing to see a kind of stable to up-slightly universe across the world.

We have seen -- which we've been seeing actually for years.

It's not necessarily a new trend.

Unlike the U.S., we have seen more of a churn down from some of the higher-end tiers, but less -- more of a cord shaving in a few markets less than -- I mean, much less of a cord cutting.

And so universe-wise, we feel like it's -- it continues to be fairly stable.

There are so -- I mean, again, it's hard to talk about the international markets broad strokes, but there are select markets which are seeing, obviously, more challenges.

Brazil has been one where we've seen more of subscriber decline as the middle class there has been hit harder over the last few years.

But overall, the universe remains fairly stable.

And the outlook for it for us continues to be that it will remain pretty stable with, again, some pockets of different markets moving in different directions.

But net-net, reasonable stability with some continued churn down from the higher, more broadly packaged tiers down to a slightly lower-priced tiers in some markets.

And I think as it relates to the Disney news about their shuttering of the Asian channels, look, I think we've obviously leaned in.

Not to say we have shut full portfolios of channels, but, as we've talked to you before, selectively in markets where we think the long-term opportunity of what is possible with discovery+ and the ARPUs that Gunnar and David talked to where there's an advantage there, we've leaned into that in select markets like we've talked to you about, in Denmark and other places.

And we'll continue to look at that.

As discovery+ rolls out in more markets internationally, obviously that opportunity will become more real.

And it's something we'll evaluate on a case-by-case and a market-by-market basis.

But for us, the market feels right now very strong for us.

We're growing both our ad revenue and affiliate revenue.

Our ad revenue is growing dramatically.

But it also gives us a relationship with every distributor.

And what we're able to do is provide a value to the distributor in the bundle where, in many cases, pay-TV is only 20%, 30% penetrated.

And then they're super with us on discovery+ and saying, let's reach the rest of the universe.

So the markets tend to look very different.

And so the idea of supporting us with discovery+ and on our traditional platform is something that just has a lot of symmetry outside the U.S., plus we have the ability to promote on our platforms.

So -- and we have a massive library.

So for us right now, having this -- generating a lot of free cash flow and growth in our traditional, maintaining and strengthening our existing relationships -- and it's a -- they need -- they don't want the channel stores to take all the business.

So they're coming to us and saying, discovery+ is terrific.

That's good for us.

It's good for you.

How do we help?

And that's whether it's the mobile players or the broadband players.

So for us, we think we can [play].

It's an advantage for us.

That's great.

And remember, we have 10 to 12 channels in each country.

So the scale is bigger.

That's great.

And if I could -- for Gunnar maybe.

I want to just make -- maybe take a step back from the quarter and ask about the OIBDA outlook over the next few years.

Obviously, 2020 took a hit with COVID.

And this year, we're seeing peak DTC investments as well as Olympics weighing on profitability.

Looking ahead, though, the DTC losses ease.

Olympics losses get better in 2022 and then in 2023.

And of course, hopefully, through all this, we'll hopefully see a recovery in linear ad trends and revenue as well.

And of course, not expecting specific guidance, but can you just help us think through any high-level puts and takes as we think about what seems like a very favorable setup?

Well, I think you've just done that.

I think those are the right building blocks.

And look, I mean, just giving a little more color, as I said before, we have stayed away from giving you very specific guidance to breakeven, et cetera.

I continue to be super, super happy with the metrics that we're seeing for d+.

And as I said a minute ago, in December, we put out there this 20% margin bogey for sort of the d+ business at scale.

That's looking incredibly conservative based on what we're seeing right now.

I mean let me just sort of take a step back here.

We (inaudible) roll to pay numbers which are top of the industry.

Churn rate, and again, I want to be careful here because it's so early days, but the cohort numbers are looking extremely compelling.

And we're doing better on ARPU than we originally modeled.

Take those 3 together, that just leads to a customer lifetime value estimate right now.

And I want to be specific, it's still an estimate, but it's significantly better than what we had in mind when we gave that number in December.

At the same time, we're acquiring these subs at pretty efficient subscriber acquisition costs.

In fact, a lot of the loss that we're looking at here for start-up investments in the quarter is essentially -- the vast majority of this is just marketing driven.

And you would assume some efficiency as the product becomes -- grows in awareness as we start getting more word of mouth, et cetera, and as we're benefiting from the high retention that we're seeing in our subscriber base.

So taking all that together, again, it's just too early just to start talking about sort of an updated margin profile for 3, 4, 5 years out, but we feel very, very good about it.

And to this point about breakeven, again, as we said before, it's not a metric we manage towards.

As long as I can acquire subscribers here with phenomenal lifetime values at a fraction of that effect or cost of that lifetime value, we'll do it.

And we also stand by what we said earlier.

I don't think anyone is going to have the margins that we will have in this business.

And I think we're going to get there much -- get to breakeven or scale margins much earlier than anyone else just because our fundamental underlying economics are now changing.

We're getting the same value from the consumer, and we're getting the same leverage out of our content.

We continue to be in super efficient verticals that we're super strong in and that we have 30 years of experience in.

And we continue to exploit our content across platforms and across the entire globe.

And it's amazing to see how this model -- again, it's early days, but how it's working.

We're getting phenomenal cross-pollination between our TV Everywhere environment and discovery+.

It's great.

And we'll just have to -- that's why I decided to give a couple more KPIs, so you can all sort of make up your minds and think about how does it compare to what you're hearing from others.

What does the model look like?

And we'll just keep giving you some transparency here and take it from there rather than giving you a long-term, 5-year outlook as well.

Your next question comes from Alexia Quadrani with JPMorgan.

Can you just please elaborate a little bit more on the demo of the typical consumer and your discovery+?

It sounds like you're skewing favorably to where the demo that advertiser are particularly excited about reaching.

And I'm wondering if -- given your outside success in the AdLite option, if you're skewing your promotional activity more toward that option versus the ad-free.

And then my second question is just really on the moderation of linear sub decline that we've seen.

You've got such great insight into the industry.

And I'm curious -- I know you don't have a crystal ball, but I'm curious if you think what's really been driving it and how sustainable it is.

Sure.

Thanks, Alexia.

It's a lot younger, more than -- about 15 years younger.

And it's also about half of people that have cable and about half of people that don't have cable.

And the advertisers are -- and also, with the length of view so high and the engagement so high, we've been doing extremely well.

To your point, we look at AdLite as kind of a breakout hit.

Here we are trending right now well over $10.

And as we get bigger, it's continuing to grow.

And we have this strong demo.

So we look at AdLite as something that, as we look at ad free versus AdLite, we've been talking to those customers, and at 4 minutes an hour, they seem very happy.

The ad free, they're very happy, but we don't really see a difference.

And the ability to generate significant incremental economics off of the AdLite.

So you'll see us pushing on AdLite.

And when -- in the ad free, which was very inexpensive as we were going to be rolling it out outside the U.S., the ability to do an AdLite outside the U.S. -- JB and I, after seeing this data, immediately, 2 months ago, were wow.

And so we've been pivoting because there could be upwards of 50% incremental revenue.

And as we get to scale more than that by doing the AdLite and you have a very good customer experience, so which was a surprise to us -- we really thought people are used to commercials they're not going to want any.

But it's one of the reasons we're not going to 5. They're so happy with the 4, and we're getting such a premium for it.

And it's working so well we're just going to ride it.

And Alexia, maybe on your other question, the moderation of sub losses in linear, I wouldn't want to comment on the overall industry trend.

Just keep in mind our better number here is very much a Discovery-specific result.

It's just we're getting additional carriage in some of the renewals of last year, and that's helped us.

And we obviously continue to be among the best distributors across the virtual MVPD space.

So that's been -- those 2 have been the helpers.

I...

And for most of our core services, for all of our core services, we have very protected carriage as well.

So the ability to -- one, I don't think they would want to do anything to us, but we have very protected carriage in terms of being on the tiers and not being able to be moved around at all.

So you'll -- you should continue to see us, by the very nature of our agreements, be at the very top.

And the fact that they could add our channels to tiers to drive viewership, which we've seen in some of our newer deals, that we might -- we'll probably do better.

Your next question comes from Rich Greenfield with LightShed Partners.

David, I (inaudible) that discovery+ users are spending 3 hours per day.

That would be -- yes, can you hear me?

Yes, now we can.

Yes.

Sorry.

I don't know what happened.

So David, I think you said before a couple of times that time spent per discovery+ users, like 3 hours-plus per day, that would be like 50% higher than Netflix and I think maybe 15x higher than Peacock daily usage.

Just want to make sure, is that across -- I mean, is that looking at 15 million subscribers and saying they're averaging 3 hours per day?

Or is that some subset of the 15 million?

And then I have a follow-up on ad sales.

I think when you were talking about -- at least in the release.

You were talking about how sort of the reach of the pay-TV universe had an impact on ad sales.

Could you just maybe explain what's happening in terms of -- is the shrinking pay-TV universe pushing more toward things like discovery+ and digital?

What exactly was the reason in that comment?

And how do you think that comment plays out over the coming 12 to 24 months?

Okay.

Thank you, Rich.

Let me clarify that.

The 3 hours per day are per viewing sub.

So not per average sub.

And you can assume that we have about a close to 50% active subscriber base on a daily basis.

So that's how you need to interpret that number.

Again, I think you're right, though, it's a great statistic across the ecosystem, and we're super excited about it.

The point about the universe shrinking, it's just -- I mean, as I laid out, we gained share and, by the way, both domestically and internationally across the first quarter.

And the viewing trends, though, for the entire pay-TV ecosystem in the first quarter just have been tough.

I mean we've seen universe estimates declines and people using (inaudible).

The thing is that we were up significantly during the pandemic, and we were able to produce content.

And we were really able to grow share pretty significantly everywhere in the world.

Some of our channels like TLC and discovery+ and HGTV, they don't have the same cycle that scripted does, but we weren't able to produce a lot of content for those.

We're now back to about 90% or 95%, and you'll be seeing more of our fresh content coming in.

So one, I think on a CAGR basis, we look different than everybody because we were up meaningfully during this period.

But two, we're going to have more content because it took us a little while with some of the Fixer Uppers that we could have -- that we wish we were -- we had some of the impact of the pandemic.

But we're now 90-plus back, and you'll see more fresh content.

And I think we'll continue to gain share and outperform.

And David, just because -- I have a kind of big-picture question for you.

As you think about where to put content, you're producing lots of it, and you said you're now back to like full capacity.

How do you and the team decide what goes digital first to discovery+ versus what goes to the linear network?

And how are you making those decisions?

And is it changing already?

Look, we're learning a lot.

We had a ton of originals.

And we could see what's working, what kind of content people are watching.

We have -- it's pretty fluid.

We have higher production values.

We've spent a little bit more star power on discovery+.

We're trying to figure out what is the plus.

Fixer Upper, we didn't -- and Chip and Jo, we haven't put anywhere except for discovery+.

That was a big helper to us.

The BBC content will only be on discovery+.

We're trying -- we're experimenting with -- we've put a 90-day series on that only went on discovery+, and it drove a lot of subscribers and a lot of viewership.

And then those viewers are watching our whole 90-day library with over 150 hours of original on there.

So we're trying to -- and then at some point there, we've put that back on, some of that content back.

That's what we're trying to figure out right now.

But we've been able to feed the growth.

As Gunnar said, we're seeing some steady and strong growth on discovery+.

And we're really focused on growing internationally where JB is taking it out.

And internationally, it's a little bit of a different story because we're local in sport.

But JB, why don't you talk a little bit about the international piece of that balance?

Yes.

I think, Rich, the other thing that's unique, and as David and Gunnar talked about before, is look, the cost efficiency of our model for most of our production makes it such that we don't have as much as the either/or.

You got a window it here or you go only window it here.

And so the exclusivity that you knew exists in scripted, which, for the price tag, you can only do 1 or the other, I think we have a very balanced and smart approach, which is we are -- for franchises and talent that are known to our linear brands, we continue to make sure that we're nurturing those audiences.

And selectively, and particularly, as David said, we're experimenting in different ways to try and see what the data tells us.

We're experimenting with some early windows or pulling a -- having a talent that's been doing stuff on linear do some additional stuff for us on D2C.

But it's -- we can do a little bit of both.

It's continuing to produce great originals and stories for our traditional (inaudible) and give people an ability to -- who want to access that and weren't subscribing to it on -- in the bigger bundles access to it on d+ either concurrently or even a bit later in some cases and, at the same time, invest in some originals for discovery+ that are unique, new IP, new faces, new talent, new stories, edgier stories, in some cases, what we could do on linear traditionally and without breaking the bank on content budgets.

And so it's a really -- it's another strength of our unique content model that doesn't make it such an either/or, and we're continuing to experiment with some of the windows and see what the data tells us.

The only point I would add is the reason I talked about in my comments about Italy is 80% of that country, all of our content is new to them.

So as you look across Europe and Latin America, even though we have a very successful pay business, that we have a huge library, having been in these markets locally for 15, 20 years, that we could now go to an offering at a very low price and be available to 80% of the country that didn't have access to us before.

So in Europe, how do we window it and how do we move it back and forth is a very different question when you're going into a country that's 20% or 30% penetration.

And it's now new to the overwhelming majority of the population.

They've heard of it.

They've heard of it.

They have good feeling about it, but maybe they couldn't afford to buy it or they want it on a different device, but it's a different calculation.

But David, it's also -- it's most extreme in some of those international territories.

But to some extent, we see the same here domestically.

As we laid out, we're up for the first time.

We're now targeting 30 million homes that don't have a cable subscription.

We're getting a significant number of additional viewers in here that are generating revenue at the same or a better ARPU.

And that allows us to invest behind us.

And that investment, over a couple of months or next year maybe, is going to raise all boats because we're just creating more of what we're best at, which is our global, unencumbered, 100%-owned and high-quality IP.

Okay.

And your next question comes from Brandon Nispel with Keybanc.

Gunnar, I was hoping you could talk more about the retention currents that you're seeing thus far for the cohort of customers.

Are you seeing retention after the first month of greater, less than 90%?

Maybe just some more color there would be helpful.

Yes.

Look, as I said before, we are very, very encouraged by those retention curves.

We are seeing a more than 90% retentions.

We're starting one step earlier.

Very, very strong roll to pay of north of 80% after the 7-day free trial, talking U.S. here, and then greater than 90% retention in the first month and then a very, very significant drop-off in sort of cohort churn (inaudible).

So again, it's way too early to talk about sort of a stable long-term churn rate here, but the numbers are off the charts compared with what we expected.

And also, frankly, based on the intel that we have been able to pull together here, I think they're also stacking up very, very nicely against competitive offerings.

Again, it's early days.

I always want to disclaim that, but we're -- we could not be happier.

And I think it makes sense.

If you look at the length of tune that we've always been seeing with our viewership in linear as well, we're essentially saying the same -- seeing the same behaviors here in the D2C world.

Then on long-term churn expectations, where do you think you fall?

You said low single digit.

But is that 2% to 3%?

Or is that more of a 4% number?

Well, look, let's -- as I said, it would be speculation right now.

I think we're going to do very, very well compared with even the leading players in the industry.

It's tough for us to take 1 month or 2 months or 3 months and say, this is where it's going to be forever.

The numbers are very good, and we are in the low single.

And we'll see over the -- even if -- we think it's trending down.

If -- we think that, that may change over the next couple of months, for the good or the bad.

But right now, the -- by every measure, the churn is significantly lower than we expected.

And it's one of the reasons why we're leaning into it, not just the length of view, but the very low churn and how happy people seem to be with the product.

And, I mean, again, what we're looking at right now is really that estimating customer lifetime value, up very, very significantly compared with what we've put in our initial business case.

That was the foundation of what presented in December and how that relates to subscriber acquisition costs.

And clearly, if we're looking at our numbers here -- I have to wring out a lot of marketing spend in the first quarter, and I was very, very happy to do it because we're just looking at the revenue contributions over the balance of the year.

It's just an amazing return on investment by any measure.

Your last question comes from Ben Swinburne with Morgan Stanley.

Gunnar, I was wondering if you could talk a little bit about how you guys think about the D2C business in the context of the overall business.

In other words, do you think about this as a single P&L?

Because it's very tempting on our side to here sort of the $1 billion drag on EBITDA.

And the path to breakeven is suggesting some pretty substantial EBITDA growth for the company over the next several years, and I'm wondering if you can talk a little bit about how you think about managing the business, particularly on the content and marketing front, so our expectations are sort of in the right place, if that makes sense.

For it -- I mean, the question is spot on, Ben, because, I mean, we are -- frankly, the matter is we're looking at 2, at least, revenue streams here now that have fundamentally different financial profile.

So the idea would be indeed tempting to say, okay, we have a digital business and a linear business.

This is not the reality right now and maybe less so for us than for others just because we have that amazing IP exploitation model.

One of the big advantages that we have is our ability to take so many bites at the apple across the global footprint and across platforms.

So that's why, right now, it is a little hard to really cleanly split out a digital P&L and a linear P&L.

And frankly, it's also not entirely in line with how we manage the company because JB and his team are very much looking at international markets in an aggregate basis.

And some of the trade-off decisions that we've laid out are very much focusing on trading off linear and digital.

That being said, we will try to make it as easy as possible for you guys to form a view.

And look, by laying out the metrics here for our discovery+ product, by giving you a perspective on losses that we have incurred from launching and by giving you at least a short-term outlook about how we expect those losses to be trending, we're trying to help you model this.

And as I said earlier, I would assume those start-up losses to start tapering a little bit in the second quarter.

Again, I also want to have the flexibility to lean in further if we find other markets are coming online that have a great opportunity to acquire subs at a multiple of their acquisition cost.

So we'll need some wiggle room here, but I'm trying to sort of give you an understanding of that financial profile.

And as I said, I mean, I am focused on long-term, sustainable growth for this company.

I think that's what's going to drive shareholder value.

And I mean if you just look at guidance here for the second quarter, accelerating U.S. distribution revenues from 12% against the tough comp, double-digit U.S. ad sales growth, 50% international ad sales growth and significant acceleration in international distribution growth to mid-single digits.

I think, again, it's early days, but I would say it's working.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.