Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Incorporated Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of the speaker’s presentation, there will be a question-and-answer session.

Also, please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin..

Good morning everyone. Thank you for joining us for Discovery's Q2 Earnings Call. Joining me today are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perret, President and CEO, Discovery Networks International.

You should have received 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 will open the call to take questions.

Before we start, I'd like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance, as well as statements concerning the expected timing, completion and effects of the previously announced transaction between the company and AT&T relating to the WarnerMedia business.

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 for second quarter earnings call.

Discovery continues to deliver strong operating and financial performance, driven by healthy momentum across all our key segments beginning with our core linear business, which continues to accelerate sequentially underscoring the durability of our content category and the overall strength of our brand, while simultaneously scaling on global streaming offerings.

Most importantly, Discovery+, which continues to have strong traction underpinning total next-generation revenue growth of 130% year-over-year and $17 million total global paying direct-to-consumer subscribers at the end of the second quarter and $18 million as of today.

With momentum around the globe, most notably behind the strength of the Olympics, which we launched our Discovery+ in Europe in a number of markets. All the euro sport player where Discovery+ had yet to launch and we had some fantastic traction thus far.

We are excited about prospects for the second half of the year, as well as for the Beijing Olympics, more on all of that in a moment.

The combination of continued strong execution across our core business, while scaling our streaming platforms drove healthy top-line growth and strong OIBTDA and free cash flow conversion, supported by vigilance on costs.

Gunnar and his team continue to do a terrific job leading transformation across the organization with an eye toward continued efficiency, particularly as we absorb investment spend and support the growth and roll out of Discovery+ and we delivered a meaningful sequential improvement in our investment losses as we lean into monetization and begin to see the benefits of scale from an expense base.

In fact, this quarter, annualized next-generation revenue is $1.6 billion and we see additional revenue growth ahead. In terms of the core, as you’ve heard from our peers, the industry just wrapped an incredibly healthy upfront providing us with the level of visibility we have not seen in quite some time.

Jon Steinlauf and his team delivered top of peer performance and a record for our company, a testament to the programming and brand that viewers love and that our advertising partners value, as well as our differentiated suite of products and platforms available to reach consumers in an otherwise increasingly fragmented marketplace.

We achieved rates of change inclusive of the step up performance at Discovery Premier that we are well ahead of the peer group. Premier has proved to be a great success. A unique vehicle that passengers first run episodes from our most popular series and networks in which sales more than doubled.

Over 200 clients are now buying premier they ratings and reach that is equivalent or greater than broadcast prime, but at a significant CPM discount. You've heard me talk this as true win-win and we keep driving this forward and clients love it.

Moreover, demand for our bouquet of digital properties across discovery+ our go apps, VoD and site with social was robust. Advertisers continued to look for incremental reach beyond linear and with roughly half of the audience space for discovery+ being non-cable households. The platform is hugely attractive to buyers.

We look forward to additional product features and offerings to roll out throughout the year to drive further monetization. But what we are currently seeing is noteworthy. Advertisers of buying targeting capabilities of our platform with innovative and intelligent solutions at healthy premiums to traditional linear.

Internationally, advertising has also come back in a big way, driven by a number of key markets such as the UK, Italy, Germany, Poland, as well as a number of Latam and APAC markets that resulted in all regions around the globe turning in an acceleration and traction throughout the quarter.

Turning to Discovery+, we are really pleased with the cadence and monetization of the service. Supported by continued subscriber traction and healthy ARPU, notwithstanding the seasonally slower summer period, only exacerbated by the post-COVID reopening.

That said, we had healthy sequential improvement in paid stubs quarter-over-quarter with most of discovery+ international runway still ahead. Here in the U. S., we continue to add to our distribution and platform footprint.

Following last quarter’s launch with Comcast, in the coming months, discovery+ will also be available to Com’s subscribers across their Contour TV and Contour stream player platforms. Discovery+ will also shortly be available on VIZIO SmartCast, advancing our roll out to all major consumer platforms.

As we've noted previously, the bulk of the 2021 discovery+ international market launches would be in the second half of this year with key market launches such as Brazil, Canada and the Philippines to come in the second half of the year.

Vodafone successfully launched in July in the UK market for mobile customers and we expect additional markets such as Spain, The Netherlands and Italy to launch as planned following the migration of our front-end technology to our common global platform this fall.

JB and his team have been deliberate and methodical in managing our international roll out to ensure the best consumer experience. This includes ensuring we have strong integrations with local partners and completing a major replatforming to get both our front-end and back-end technologies on one common platform.

It is a complicated roadmap of engineering and commercial logistics, not to mention COVID challenges around the globe in some of our tech hubs. At the same time that we have been planning, producing and delivering the Olympic games from Tokyo.

We continue to learn a lot as we go in Terms of what's working and what's not with respect to marketing, branding, tech product and features, as well as distribution partners and platforms.

We are very pleased with the metrics we look at to evaluate our position within marketplace, consumer acceptance, roll to pay, viewing time per active subscriber, churn, monetization and so on.

We’ve provided an early glimpse across these metrics last quarter and I am pleased that we continue to track well against our internal plans and the momentum we are building as we look at ahead to our exciting plans post-merger with water media and HBO.

Taken together, we could not be more excited about the possibilities ahead to serve consumers with the deepest and most compelling content offering in the world. Consumers want choice and simplicity.

We believe that the combined company will be able to offer more of both, in a video market that could see more consumer selectivity as the market matures, we believe the combined company will be well-positioned to compete in the global streaming marketplace.

The regulatory process continues to move forward as planned, giving us confidence in our previously stated timeframe of mid-next year to close. And lastly, the Olympic games in Tokyo, which as I noted earlier has been a very pleasant surprise, during what can only be described as challenging circumstances.

At this point, about halfway through, we've already doubled our total sub gains from the last Olympic games in Pyongyang. With nearly three quarter of a billion minutes of Olympic content streamed, up over 18 times versus the last case.

Like with the winter games, we've enjoyed some truly remarkable viewing shares in key markets like the Nordics in which our share of television viewing for certain sports has been upwards of 60% to 80% and with outstanding traction with streaming across all markets, notably in the UK and Italy, which are newly launched markets for Discovery+.

We are very excited about the upcoming Olympic games in Beijing in early 2022 and then of course Paris in 2024, right in our backyard. These are truly hallmark, high value branding events and our super funnels that drive awareness, viewing, and subscribers to our platforms.

With that, I'd like to turn it over to Gunnar to take you through our financials, after which Gunnar, JB and I look forward to taking your questions. .

Thank you, David, and good morning, everyone. Thank you for joining us today for our second quarter earnings call.

Echoing David's Comments, I am very pleased with our operating performance this quarter, in with both our traditional core linear business, alongside our next-generation streaming platforms combine to deliver very healthy revenue growth and impressive AOIBDA and free cash flow conversion.

While comparisons against last year's advertising performance were very favorable, we’re especially encouraged by the acceleration and sequential improvements we've enjoyed from every region around the globe and returned to near pre-pandemic levels in the U.

S., Latin America, EMEA and Asia Pacific, all turned an impressive results and of course, discovery+ is providing a nice tailwind to our performance. Turning to second quarter results, beginning with the U. S segment.

Advertising revenues increased 12% year-over-year, as we continue to take advantage of a very low robust advertising market for both linear and digital inventory.

We saw strong demand in all key categories including CPG, pharma, cosmetics, auto, retail, and home improvement, far more than offsetting the softer viewership across the industry, as compared to the peak COVID Q2 of last year. Scatter CPM dropped 50% plus versus last year's upfront at up 130% year-over-year.

Additionally, next-generation advertising demand was very healthy across our suite of products with revenues up 70% year-over-year. Specifically, for discovery plus, more than 800 advertisers have now bought inventory on the platform, more than 4 times the number of advertisers that we had targeted by the end of the second quarter.

Interestingly, more than 90% of all clients who have bought inventory in discovery+ also bought inventory and our Go and TV Everywhere offering underscoring the power of integrated audience solutions across our suite of digital products. Furthermore, we continue to roll out new ad products on discovery+.

For example, we recently launched Green Lives, an ad product that allows clients to own the first ad served to every user on discovery+ on a specific day.

As noted earlier, the strength the upfront market under the continued relevance and importance of television as an advertising media contributing to greater confidence in our ability to drive top-line advertising revenue growth.

While we face comparisons against political advertising in the second half of the year and some modest headwinds from the Olympics here in the U. S in Q3, layering in the tailwind from this upfront, we should enjoy sequentially faster revenue growth in Q4 over Q3.

Distribution revenues grew 12% year-over-year on a reported basis or 18% like-for-like, primarily driven by continued traction in monetization of the Discovery+ subscriber base helped by linear affiliate pricing, offsetting the year-over-year decline in Pay-TV subscribers.

Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio subscribers were down 7%. However, recall that we sold Great American Country during the quarter.

When adjusted for this sale, total portfolio subscribers would have been down 3% year-over-year during the quarter as we continued to benefit from specific distribution gains across certain networks from recent new awards.

We will begin lapping those in the coming months and you should expect to see our linear subscriber trends more in line with the industry going forward as we have discussed prior.

Worth noting also is that the sale of GAC did result in a modest headwind to both reported advertising and distribution revenue this quarter as we did not recognized any contribution from our partner so far. Turning to the International segment, which I will as all discuss on an ex FX basis.

Advertising revenues increased 70% year-over-year as we saw significant growth off the second quarter last year. We saw strong revenue growth across all regions with the pace accelerating throughout the quarter with a number of key markets nicely above 2019 as David mentioned.

Distribution revenues increased 6% versus the prior year, supported primarily by direct-to-consumer subscriber growth. So as noted, there were no material new market launches during the quarter. This was partially offset by lower liner affiliate rates in certain European markets. Total company operating expenses increased 33% during the quarter.

Cost of revenues increased 25% year-over-year, as sports returned to a more normalized schedule this year versus virtually no sports last year due to COVID-related shutdown, as well as the continuing investment in B2C content. SG&A increased 43% versus the prior year as we invested in marketing and personnel to support our discovery+ roll out.

We continue to focus on driving efficiency in our core linear networks and we remain on track to reduce core linear OpEx in the low to mid-single-digit percentage range for the year.

As we guided, we reduced our losses from investment projects significantly in the second quarter to roughly $250 million versus more than $400 million in the first quarter, benefiting from both strong next-generation revenue growth, as well as more efficient marketing spend, primarily in the U. S.

Q2 next-generation revenue growth of 130% to annualizing at the $1.6 billion runrate and we expect additional sequential quarterly revenue growth through the year and beyond.

As we launch in new markets during the second half of the year, we expect that we will continue to incur investment losses fell more or less in the same ballpark this past quarter, mainly driven by content and marketing costs. We continue to expect that investment losses will peak this year.

Overall, we remain very pleased with all of the core KPIs we closely monitor and we continue to attract well against our internal plans. Global direct-to-consumer ARPU remains consistent with Q1 as the impact of certain international partnerships and associated early promotional activity is offset by our strong and growing U. S.

ARPU, which is nicely supported by the ad live discovery+ product. Roll to pay still remains high at an average of close to 80% across the global B2c portfolio.

As the averaging base of per viewing subscriber, which is more or less in line with what we saw last quarter, as well we remain pleased with overall churn, which naturally is at the lower end for the most the mature subscriber cohorts and skews higher for the most recent ones.

As I noted, the vast majority of our international discovered+ sales thus far has come from existing markets.

And we plan to launch in a number of key markets and territories during the second half of this year, including Brazil, Canada, and the Philippines, alongside the additional Vodafone launch in Italy, The Netherlands and Spain around the end of the year.

It is worth highlighting that a handful of these market launches have been extended out about a quarter or so later than our original internal plans call for, primarily resulting from the requisite harmonization of our technology platforms, the added benefit of Rich will enable us to roll out at international ad live products.

This has been a heavy lift, particularly, given team constraints related to COVID in our tech hubs, primarily in India. Other puts and takes to consider will be our ability to maintain and keep subscribers that come in during the Olympic games though the initial roll to pay numbers was very encouraging.

Net-net, we remain very excited about our local go-to-market strategies across these important countries through the end of the year. Turning to house housekeeping items. Net income for the quarter was $672 million or $1.01 per share on a diluted basis.

First, please note, we recognized a $0.09 per share gain on the sale of Great American Country as well as a $0.09 per share non-cash gain on an existing investment in Sharecare, the company that recently went public.

Second, our effective tax rate during the quarter was negligible as we recognized certain non-cash cash tax benefits totaling $162 million or $0.24 per share. Given these tax benefits, we now expect the full year effective book tax rate to be the mid-teens range.

For cash taxes, we are now anticipating a slightly higher rate in the high 20% range for the year, excluding PPA amortization, as we are positioning our tax footprint for optimal outcomes across a number of legislative scenarios for 2022 and beyond. Third, and finally, the PPA impact was $0.30 per share.

Adjusted for the above, EPS would have been $0.89 per diluted share. Now, turning to free cash flow and our leverage. We generated $757 million of free cash flow in the quarter, representing a near 70% conversion rate of d AOIBDA, notwithstanding the continued investments we are making, as well as the return to normalized content production levels.

Year-to-date, our AOIBDA-to-free cash flow conversion rate is nearly 50% and we remain confident that we will convert at least 50% of our AOIBDA to free cash flow this year even with the anticipated new market launches and slightly higher cash taxes mentioned earlier.

At the end of the quarter, our net leverage was three and a quarter times, which is within our current target range. We expect our net leverage could be temporarily at the high-end of target range due the Olympics in the current quarter.

As a reminder, we do expect to recognize $175 million to $200 million of AOBIDA losses during the third quarter, as a result of the Olympics. So we continue to expect that we will break-even or generate slightly positive AOIBDA and free cash flow over the life of the deal.

As indicated, when we announced our transaction with WarnerMedia, we did not repurchase any shares during the quarter, as we continue to invest in our next-generation initiatives and conserve cash ahead of the closing of the deal.

And finally, we now expect FX to have roughly a positive $100 million year-over-year impact on revenue and a negative $20 million impact on AOIBDA in 2021.

We continue to operate in a solid footing dynamically growing our direct-to-consumer business with contributions to our top-line growth becoming increasingly meaningful and optimizing the resilient core linear business creating strong conversion of AOIBDA-to-free cash flow.

We remain focused on delivering solid operating performance, while we’ve built the framework to support long-term sustainable growth and shareholder value. And we are eager and excited once we gain all the requisite approvals to roll up our sleeves to capture the tremendous opportunities offered by our proposed merger with WarnerMedia.

And of course, we look forward to speaking with you at the appropriate time on our thoughts and plans around integration, strategic direction, synergy, et cetera. With that, I'd like to turn it back to the operator to take the questions. .

[Operator Instructions] Your first question comes from Kutgun Maral with RBC Capital Markets. Your line is open. .

Good morning and thanks for taking the questions. And just on direct-to-consumer, can you help us better understand the international roll out trajectory? I know you called out Brazil, Canada, Philippines and a few European markets with Vodafone for the back half of this year. Some of these are particularly big broadband and mobile markets.

I'd be curious which market launches or distribution partnerships you see as the biggest opportunities? And maybe more broadly, how are you thinking about the subscriber momentum into the back half of this year, especially I think there is some concern that we might see some churn pick up with some of these distribution partnerships that had fixed line promos.

And then, just lastly, I know it's early, but any thoughts on the international roll outs looking for 2022? Thank you. .

JB?.

Yes. So, we have, as you noted, we have the markets we've announced that we'll be rolling out. I think we feel very good about them. When we announced when we get closer to the actual release date we'll will also be announcing in many of the markets as we’ve done to-date both in the U. S.

as well as internationally, partners that will be launching with and so you should expect sort of fairly consistent to what our historical precedent has been from strong partnerships in a few of those markets that we roll out. And so, we feel good about that.

I think as Gunnar touched on in his comments, we are - they are all sort of leaning towards more sort of September and into the fourth quarter where we had hoped obviously to be slightly more ahead of that into the third quarter, but due to obviously wanting to make sure we got the Olympic games off the ground successfully and getting this replatform and completed.

Some of that will hit a little bit later in the second half of the year, than we had initially thought. And in that time period, I think we do see internationally some obviously – we are expecting significantly more growth coming out of those new market launches as we get towards the back half of the year.

As it relates to 2022, I think it's a little bit early to talk about that. The only comment which David and Gunnar made amplify is, obviously, as we get later into 2022 when we get further visibility on the timing of the WarnerMedia deal.

We obviously will look at making sure we stay smart in the context of when that timing and when that deal might close as to how we maximize the roll out schedule of those services into 2022. So that's I think as much as now. Gunnar or David, if you want to add anything else such as... .

Just to add, the execution on the Olympics was really almost flawless. And you - all of our - the entire Olympics was offered throughout Europe on our product. People are spending a huge amount of time as you've seen it’s 18 times what it was before for Pyongyang. It was very simple. The navigation was simple.

We spent a lot of time making sure we get the product right, that's going to help us, but we're also, as I've said, we are learning.

One of the things that we've learned along the way is navigation and simplicity is very important for people who are able to find the products that they want, particularly with a complicated product like the Olympics and it's really working. We'll have Beijing coming up in a few months. It's very unusual that we get it back-to-back like that.

So we think that we can do better in terms of keeping subs and growing subs because we don't have a two year lag between the two games, which is advantageous. The other thing that we're learning as we look to roll outside the U. S. is that, ad live is a really compelling product. We're generating about $6 in advertising per subscriber here in the U. S.

with three minutes of advertising and the friction for users is non-existent. When they used to seeing 14, 18 minutes to C3 and so there may be a real strategic opportunity for us here. We're doing extremely well in packaging that product together with linear, together with AVOD here in the U. S.

and so, whereas a year ago, we thought everything would just be subscription, we are looking at AVOD as a meaningful opportunity to go into markets at a lower price, get more scale and be able to pick up actually more money. We're making more money on our ad live product plan awful lot here in the U. S.

And so, doing that requires more engineering, more coding, but we want to get it right. And as JB said, as we get closer to the Warner Brothers discovery to our transaction, we'll continue to look - right now, we are both accelerating and Warner is doing any terrific job. John Stankey and Ann and Jason.

You take a look at Casey, you take a look at the momentum that they have, they're driving hard, we're driving hard and then we'll true up together. At some point, we really do have our strategy. We can't share it with you right now, but we will look carefully as to how we want to true these up together.

And so that might affect as we get closer to the approval, what exactly we do knowing that when we're coming together as a new company. .

And Kutgun, maybe one thing that I'd like to add is, your question on churn. So that continues to track very nicely ahead of our plans. And most importantly, roll to pay is also very stable as I said close to 80% across our various products.

And to your point about some of those distribution partnerships starting to come off of the initial period, that's another area where we've actually been positively surprised. It’s a little lower there as you would expect, but not as meaningfully lower as we had modeled. It's actually been a positive surprise. .

Okay. Let’s go to the next question. .

And your next question comes from Steven Cahall from Wells Fargo. Your line is open. .

Thanks. One for David and one for Gunnar. David, some press reports suggested that you might have made some comments at Sun Valley about the merger, maybe timing and further industry consolidation. So those of us who weren’t invited to the conference. I was wondering if you could just maybe expand on some of those comments in this public forum.

And then, Gunnar, I think you reiterated doing a huge investment this year in terms of the AOIBDA drag at next-gen.

As you think about the merger with WarnerMedia and the BBC Services, I know selling on remains pretty sacred, but when you think about either factor tech is there any reason you might decelerate that, which you're going to be combining all these systems at some future point.

And could that lead to any upside to maybe the five times leverage target when you close? Thank you. .

Thanks, Steven. Well, let me first speak to the merger timing. I was in DC last week. I met with across the board, spent the full day. There is broad support for this transaction. We haven't heard any pushback. We haven't seen any push - double pushback. This becomes a very strong company for consumers. A more compelling stream of business.

And so, right now, it feels to us on every level, like we've seen green lights, we are not seeing any yellow lights or red light. Having said that, we're not in control of the timing. Disney was able to get their deal done in six months. Everything so far is extremely positive. But some of the timing with respect to the IRS and the DOJ.

We can't - they're working very effectively with us. The AT&T team and John. John has a terrific team that's working with our team. But ultimately, it could be significantly sooner. It could be a little later. We are just not in charge of the timing. But we feel very good about it at this point.

There is nothing that we see and I mean, we're still hoping that we could really get lucky that it'll will happen a lot sooner. And that's what we're all pushing for. On consolidation, look, I take a look at this business, Warner Brothers Discovery.

And there is just - the toughest thing to do is to put together a great library or a great menu of content or IP. That is the most difficult thing to do. Yes, we need a strategy, but what the price is? Is it ad is it ad live. It’s exactly how do you go to market in each country.

But the toughest thing to do is come up with a menu and have the strength of content to not only get people to come there, but get them to stay.

And one of the things that's happened since our deal, as you look at the Amazon deal, or you look at the announcement of the Reese Witherspoondeal, almost $1 billion for that basket of content, almost $9 billion for the basket of content that that MGM has. Great company. Reese developed a great company. But we own significant amount of the MGM library.

This new company when it comes together. Harry Potter, King Kong, Godzilla, Batman, Game of Thrones. You look at what Casey is doing right now with Hats, White Lotus, Sex and the City coming back, Friends, Friends Reunion, Space Jam having a big week – a big weak against the Marvel property. And so, which Toby put together.

And Jason, they're sitting on top of just an extraordinary library of IP. Hanna-Barbera, all these things you cannot create. And so, we look at all of that and we say, we can't wait to close. We think we have the broadest, most compelling IP together with what Discovery has and as Gunnar said, we're seeing over three hours of engagement.

Our churn is very low. We have great nourishment and the combination of Harry Potter, King Kong, Batman, together with all with all of our great nourishing content globally and all the local content we have around the world, as well as sports and news, we think makes us really compelling.

Having said that, you look at – here is two transactions that have happened. People need more IP. I believe that what we have is, not only do we have, I think the strongest set of IP, but we have the broadest global - the most global content in language of anybody. So, I think we started off in a very, very strong position.

I think we're fine if nothing happens. But I believe that over the next couple of years, there is going to be more and more people are going to look and they are going to raise their hands and there will be more consolidation. There will be a more IP libraries sold, because you need a lot of content to be successful.

And I think people are going to take a look at what we have. What John Stankey put together, together with what we have and it's really going to be formidable. And Disney and Netflix have gotten across the lakes and we think that this will be the third global streaming service successful, sustainable, that's our mission.

And a lot of the other IP that are subscale will probably be raising their hands or people, there will be a lot of consolidation. And some of that may be opportunities for us. But right now, I really like where we are. .

Okay. Steven, let me take the other question on peak investments. Again, as said, we're reiterating that expectation that 2021 is the peak here. And again, I think it's coming together very nicely. Right, you're seeing the revenue contributions ticking in. We're tracking at an annual runrate of $1.6 billion.

Next-gen revenue is now a significant step-down in our startup losses from our investment initiatives overall.

So, this is a matter that we've been talking about previously and I don't want to go through all the details again why? But we will be able to get some nice profitability out of streaming at comparatively lower subscriber numbers and that’s earlier. To the second part of your question, HBO Max had guided to 2022 being peak investment year.

That's how we’ve reflected in our model as well. There is no update right now. It’s sort of the operationally with [Technical Difficulty] position here. And again, from that perspective while I don't want to give an update on that five times leverage expectation right now. Again, I view that as a non-issue.

We have a ton of confidence that we will very, very quickly get to where we need to be. .

Okay. Let’s go to the next question. .

And your next question comes from Doug Mitchelson with Credit Suisse. Your line is open. .

Thanks so much. Couple questions if you don't mind.

Gunnar, on SG&A, it was down quarter-over-quarter in the United States and you mentioned coming off of launch marketing or more efficient marketing, Is this 2Q level sort of a good SG&A level that we should expect to continue? JB, and David as well, JB, what have you seen from discovery+ so far in international markets? How does that inform your launch strategies for upcoming markets? And in particular, if you think about pricing for this service, you better off pricing at a premium for super fans or pricing low and trying to drive the services broadly as possible.

Thank you. .

Let me take the SG&A question quickly. So, the way I would look at this Doug is, and I said as much earlier in the prepared remarks, I view this sort of $250 million roughly give or take level of investment losses as a probably best estimate as of today for the third and fourth quarter.

That implies since we're assuming revenue growth that we are planning to spend more. And again, we want to continue making those investments to growing products with - again, a very, very strong long-term value proposition. So you should see a general trend of expenses growing. But very much in line and then over time slower than the revenue side. .

Just, look, the - in terms of our all-in mission, our all-in mission, we're not going to get into how we are going to price in each market at this point, because it wouldn't be appropriate. We're not going to talk about exactly how we are going to package at this point, because we just can't do that right now. We have a compelling plan.

We are looking at – we are going country-to-country. We are actually trying some different things, so that we can learn more. We're watching the great success that John and Ann is having as they accelerate. But, we're focused on 200 million global subscribers. This is not about niche.

This is about global subscribers and for me, after we close this deal, it is going to be two absolute missions. Mission number one is drive direct-to-consumer to 200 million subscribers in every language in the world and with the product that's easy to navigate and use. And we think we can do that when we close, we're both growing.

So we're going to start with a good base to get there. But that's the left side. The right side is, focus on having the best creative company in the world. And Warner Brothers has been the greatest creative company in the world.

The place that the talent Warner come, the place where they feel nourished and support it and that's the history of Warner Brothers. And most of the great content that that I've seen that we've all seen, we don't even realize that in the end, we see that Warner Brothers shield and it stands for something. It stands for great storytelling.

And we are, one of maybe the only company that has the ability to focus only on that one thing. We're not in the phone business, when this deal closes. We're not in the retail business. We are not cloud business We are not in the cable business. And so, that's the focus.

And that singular focus I think will drive a great culture this is where people that care about content, that love content, that saw the magic when they were kids and they looked up at that screen. That's why we all got into this business. And that's the only business that we're in.

And I think that, that together with the fact that Warner Brothers itself, we can open a movie everywhere in the world, as well or better, maybe best of class. And that's not going away. The motion picture business is not going away. It's why it's the top of the patina. It's why the greatest writers, producers, and creative talent came.

And when you look up at that big screen, that's where stars are made and that's where magic happens. And so, 200 million subscribers, a great team putting these companies together to drive toward that and a great creative culture, with a - at the very top of motion picture business, that'll will be 100 years old in two years.

And has a heritage of all the great story telling that we all grew up with. That's the company and that's what we're going to drive for. .

Great. .

And if you want me – and just one thing I can say on the current pricing to your question of discovery+. I will say that what we've seen so far is, the very broad, very scaling distribution, this is the international growth that’s not driven by one market.

We've seen very even and very significant million plus markets so far across some of our biggest territories. So we feel that it's not necessarily a question of going high price, small or low price broader.

The reality is, that we're able to hit this sweet spot right now with the pricing that we have in most of our markets which is on average for the entertainment here in this $4 to $6 price range and that that's scaling very nicely, Now, again, it’s hard to talk about the globe in one sloop, because ultimately markets where we have more premium sports, we will price higher.

Markets where we don't and then have lower price sensitivities like Latam or Asia, we will price lower But generally, we feel like we can actually hit a very attractive price point, much higher than our wholesale pricing today and still be in a sweet spot that ultimately delivers scale at the same time. .

Right. Alright. Thank you..

Okay. Let’s go to the next question. .

Your next question comes from John Janedis with Wolfe Research. Your line is open. .

Hi. Thank you.

David, maybe, we could start, can you give us more color on Discovery Premier? How much more inventories available for you to sell into the market? Can you delve a little more again? And what does the CPM lift relative to the rest of the portfolio? And then, maybe shifting to discovery+, anymore early trends you could talk about from a viewing perspective? Is the proportion of time spent there on specific networks or programs consistent you’re your linear networks and for the content that's premiering on discovery+, are you seeing a lift and subscriptions or impact on the new ratings thanks?.

Thanks, John. Well, first, the upfront was - the best upfront that I've seen in my career. On average, it was up about 20 and we were able to beat that significantly. So I think, I believe we were best of market, but this was the market that was up 20 and we picked up. We did much better than that and one of the reasons is because of Discovery Premier.

And in some ways, it's a great story, but it's one that it starts off with the fact that we're not getting enough and we haven't been getting enough for in CPM for the great content that we have. And broadcast is in the 60s and where we have been in the 20s. And so, one, we made some more progress against the broadcasters.

But Discovery Premier is in the 40s. And so, for advertisers to be able to get content that has the same or better reach with the same or better engagement in the 40s. For us, it's a dramatic increase. But for advertisers, it's a significant decrease because instead of buying a broadcast at the $64 and buying us for $45 or $43 or $47.

And so, it's a real win-win and we are able to service. We have great demos and we're able to go - not only do we have the premier product, but now we have discovery+ with the engagement and a much younger audience. And so we could put together between linear and discovery+ and Go, a really compelling package.

And the result was, our most successful upfront. And I think it's the fact that, ratings are down in the aggregate is something that we are going to be living with for a long time. But look, I’ve told this story before, but in the 90s, we went up and when I was working in cable group, broadcast was going down and advertising rates were going up.

And we all said that can't continue and it continued to the date. It's been going on for 20 years. I can't predict that that's what's going to happen. But there is not a lot of great inventory out there. Inventory is declining. And we have some of the best inventory out there. And then, one, it's generally underpriced.

So when we get big increases, it still looks good. But two, the overall bouquet of what we're offering now between the young demos on discovery+ and Go and the engagement in the audience that we have on all our brands and what we can put together for advertisers is real scarcity. You have the scatter market at plus 50, right now.

And there are a lot of others that are under-delivering and so they'll be out of sales. So, in general, when you see the fourth quarter, you're going to a real opportunity.

When I talk about visibility, it's because the numbers in terms of the upfront that's going to start in the fourth quarter and it's a good think, because maybe we'll be down 15%, but maybe the appetite, it looks like the advertising thing is going to be up dramatically more than that.

We can't predict whether that will continue, but it's - right now, it's a trend with scarcity and the way that our content and linear content can deliver an audience for an advertiser, the prices are going up. And so we hope that continues because it's an offset and it allows us to still grow in linear, which is meaningful. .

And generally, I'd say, to your question about engagement on discovery+ and content, it does - it does, John, largely, obviously follow a lot of our biggest networks.

But the genre is certainly in the crime, paranormal, a home, the discovery content, a lot of this sort of traditional our core genres in the linear space also are those that are driving our discovery+ activity in the U. S. That is obviously, reality, in the TLC, sort of genre, also a big driver for us.

As you spread out and go internationally, it becomes a little bit more diverse in the sense that obviously, we have bigger broadcast content in markets like Poland, the Nordics, Italy.

And so we have bigger entertainment formats, also that are working extremely well and then sports which we talked about both in terms of the Olympics and outside of the Olympics. So it becomes a slightly more diversified story outside the U. S. But in the U. S., it is driven by a lot of the core, John, you think about us for TV. .

Thanks..

Okay. Let’s go to the next question. .

Thanks. Your next question comes from Jessica Reif Ehrlich with Bank of America Merrill Lynch. Your line is open. .

Thank you. A couple of questions. There have been press reports regarding your interest in Channel 4 in the UK. And I mean, it's great that you are still looking at transactions like or you're about close one of the biggest. But can you talk about M&A priorities or opportunities outside the U.

S.? Can you give us an update on what's going on at Poland from a regulatory perspective? And then, finally, in advertising, how much crossover is there on the various platforms for your advertisers? Or are you tracking different advertisers to different platforms?.

Well, let me start and then JB I'll pass to you. We can't comment on Channel4.

But I would just say, we're focused on one thing and one thing only; closing this transaction and putting together this spectacular company that has global IP leadership in terms of the content that we have, local content, sports news, the best of bouquet of content, together with strong leadership at both companies and both having a really good platform that consumers are engaging with their liking.

This is - our focus is singular. Close this deal and drive this company as I’ve said, drive the subscription piece, create a culture, and drive a culture where creative talent wants to come and walk to tell their stories. That's our focus. So, we are not going to comment any other specific transaction.

But I do think that there is lot of players that are sub-scale. And a lot of them are going to be figuring out over the next couple of years what they do. And the good news for us is, we think our hand is very, very strong. That's the going around the world and we will focus on getting this deal done and taking that hand to market. .

And Jessica, the only thing I'd add to that one is also, we think it as a - we're proud of the fact that, unfortunately, every time that anything is potentially up for sale, our name gets mentioned, because we have obviously had a successful track record of acquiring, integrating and then successfully managing all sorts of businesses.

The reality is, oftentimes, and the David said, particularly, these days, our focus is in a different direction right now with the closing of the Warner deal. That's our primary focus. So, in terms of the ad sales, clients and I’ll come to Poland at the end. On ad sales, we do see a vast majority of our clients overlapping between linear and digital.

So, it's a very strong correlation and a number of clients were doing both. On Poland, look, as we’ve said, I think publicly in the past, we remain very committed to the business. It's a great business. It continues to be a growth business and a very healthy business for us. The environment is obviously challenged.

We're actively talking to all the different constituents and stakeholders to make our case. And we think it'd be very, very economically irrational for the government to try and pass any laws that ultimately would change our position and make the environment way less attractive for foreign investment, not just media any foreign investment.

And so, at the end of the day, we're continuing to work that situation aggressively on all sides. The U. S. government the EU have all been very supportive and fully behind us. And we'll keep you posted as that continues go on. .

Thank you. .

And your next question comes from Robert Fishman with MoffettNathanson. Your line is open. .

Good morning. David, following up on your earlier IP comments and tying in what you're are seeing with the Olympics.

Can you share updated thoughts on how important international sports, or it’s hard for your company, especially as it relates to driving discovery+ subs when the next round of sports rights come due? And then for you or JB, can you update us on how the Pay-TV ecosystem looks outside of the U.S.

as it relates to cord cutting and whether you plan to be more aggressive shutting down linear cable networks as discovery+ ramps up?.

So, let me just start by - with the core cutting question. Outside the U.S. in the aggregate, with the exception of last quarter, the period during COVID where we really grew, we're doing as well or better as we've ever done in history.

This past quarter, we were strong - much stronger than we were in overall share than we were in 2019 or any before through all those prior years. And unlike the U.S. where pricing is so high, pricing for entry cable is much lower around the world. And so, there is some decline and there is some decline in viewership.

But it's much more moderated than what it is in the U.S. JB can speak a little bit more to that and then I will jump in on the sports piece. .

Yes. I think, again, it's hard to paint it all with one brush. There are, as David said, generally broadly, we do see some cord shaving. But the cord cutting has remained fairly stable internationally. So, we don't see the same sort of dynamics as we've seen in some in the U.S.

The cord shaving is really sort of elements of some of the higher tier and higher price point people churning down to lower tiers in certain markets. But those are, I'd say, more limited and in the higher priced markets like northern Europe in some cases.

And then there are markets like Brazil, for example, for macroeconomic reasons that certainly have seen subscriber decline over the last few years as the middle-class has been squeezed.

But at the same time, we know in the markets like that the video consumption and video viewership is as hungry as ever, And that's where, particularly with the launch of discovery+ coming, we're at an even more attractive price point than what they would have paid it even for a more reasonably priced Pay TV package.

We're excited to see those subs that might have left the Pay TV bundle over the last few years have a chance to come back to us at a more attractively priced discovery+ option going forward. In terms of shutting cable and that's, like I think Disney has announced, we still see a very healthy business on the Pay TV side.

The hybrid deals we've talked to you about where we've done deals with existing partners the continued carriage of some of our channels at healthy economics thus launched discovery+ and so do a kind of two for one. Those have been very successful for us so far and we continue to see a lot of opportunity to be able to drive both of those.

So we don't see necessarily the shutdown down scenarios, But over time, there may be a handful of markets where we say that maybe worth experimenting. But for now, we see a healthy ecosystem and healthy partnerships with this hybrid model. .

On the sports, we're learning. I mean we've been at it for now over four years. So we needed to find a better product then we were going direct-to-consumer in Europe with individual sports. And the good news is we are trying different things. And we're trying to figure out ultimately, the consumer is going to decide how they want it.

And we're finding that we're having more success when we put the sports together with the entertainment together with the non-fiction. But it's early days. It's still only the third in it.

So in a lot of these markets now, where we have football, where we have cycling, because we're putting it all on D+, we're looking and we're trying to get a sense of what's the acceleration of subs. What happens to the churn? Right now, it looks quite favorable.

We are also anxious to see which will - where we're not getting an inside look at all in Warner, but they launched in Latin America and they launched with a lot of very compelling sports like football in Latin America. What is their experience? The Olympics has been a really good experience for us. We're doing very well with it.

Share is up 30% with Pyongyang. We are finding that the engagement is much higher, as I've said. And so, we don't know yet what the churn is going to be. I think it's going to be helped by the fact that we have Beijing coming. But ultimately when these companies come together, it's all about the IP menu. We have news. What roles will news play.

We have sports. It’s not the leader, we are one of the leaders in the world in terms of the sports. Jeff Zucker and John Stankey, and Jason got, we're able to lock up sports rights in the U. S. with some of the best leagues outside of football, which is compelling.

So, when you look at all that IT and figure out, what do we do with it? How do we offer it? Is it all pay? Is some of it free? Is it all together in one package? Is it in two packages? But the sports, I think is not that different from Harry Potter or a King Kong or DC comics or a lot of the HBO IP, but with the exception of the fact that we don't own most of the sports.

So, what we've done is we try to get long rights for those sports and be very careful about what we pay for it. But we will - there is a difference in that when you are building these the franchises that we have, whether it's Ship and Joe, whether it’s the Ophrah Winfrey pro product or whether it's Warner Building in DC, you own that forever.

And sports you have to eventually come back and pay for. And so, there will be a view over the next several years of how that - how important sports is. How - and what the return is on it.

But we're very happy with the fact that we have fantastic sports globally that we'll be able to use when this company comes together in the package and we're doing very well with sports in Europe right now.

JB anything to add?.

I think that's exactly right there. .

Robert, I want to just repeat one thing that David said in passing, is to make sure that everybody has heard this.

Our second quarter this year was the second strongest in our history internationally when it comes to actual volumes delivery in terms of eyeballs of viewership, second only to last year’s second quarter, which was obviously impacted by the massive COVID spike. So it is a fundamentally different story internationally versus domestically. Yes. .

And we're getting better at doing local content in these markets that people love and they want to watch. We are gaining share. So, even though some people may be veiling on linear, the linear advertising market is extremely strong. Our share is growing. And we're doing what's very hard.

We're programming in these countries in every language and we have teams on the ground that are creating content in language, in country and it's paying off. .

Let’s go to the next question, please. Thank you. .

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

Thank you. Good morning, everybody. I want to ask about the upfront and then also about the streaming subs here in the third quarter. David, obviously, there is tremendous demand for linear television as we head into the fall season.

Can you talk a little bit about whether Discovery was able to navigate some of the measurement challenges that Nielsen has created in the past around delivery and make us, were you able to do more non-Nielsen deals? Or do you think that's even cost the company any money in the past and maybe it's something we shouldn't get that focused on with that? I know you've spent a lot of time on it and it seems like the demand side of advertising is strong.

I am curious if you could just comment whether you guys feel like that's a headwind or you've sort of navigated around it? And then on streaming, I don't know this is for Gunnar or for David. The $18 million number, I guess, captures probably the Olympic lift you've got.

And it seems like you're talking about most of your international launches coming in Q4. I am just wondering if there is any other headwinds or tailwinds we should be thinking about in the third quarter or if we should think that there probably won't be a lot of growth here in August and September.

Just anything you want to add as we think about Q3? Thank you. .

Thanks, Ben. Look, we have a big data - a big data operation and the good news is, on discovery+ and Go on – and to some extent on linear, we've been working very aggressively to build our own data and we've been working with the advertisers and that has been extremely helpful.

In the end, if we could have better data, you would see a dramatic increase in - that's the future better data. Unfortunately, Nielsen is a whip. And it's just - it's massively disappointing that Nielsen can't get us act together and the answer is we have lost money. Everyone has lost money.

It's just you're dealing with a very antiquated delivery system. We've all learned how to get along with it. We do it by all ramping it with our own data. But, recently they've just been wrong. Look, this one thing if you have in antiquated system and then you augment it. But the antiquated system itself is unreliable.

And so as an industry, we got to figure out how to deal with it. We are competing with the likes of Google and Facebook where they have the best data, the cleanest data, the most and you compare that with this antiquated system. So, we continue to work on our own I don’t have a lot of hope for Nielsen. I think somehow it's an industry.

We are just is going to have to work our way out of it from a technology perspective and leave them in the dust, but they just can't – they can't get it together. It’s a shame. .

And on the on the streaming subs then, so, look, one thing that we all need to keep in mind that we've said many times it's very early still, right? We don't have a full year yet of a normal cadence and that's just important to keep in mind.

But what's very clear is that obviously there is a seasonality throughout the year and the summer months as you would expect across video in general are not the strongest. And if you look at the numbers that we have reported, we've been able to add 1 million subs on average across these months which again, I think I am very pleased with.

And to your point about the Olympics, it's important to keep in mind that there is a certain amount of free trial in those. So, our 18 million subs number does not include all of the subs that we are gaining or will gain through the Olympics. .

I got you. Good point. Thank you, both. .

Let’s take our last question, please. .

And your last question comes from Alexia Quadrani with JPMorgan. Your line is open. .

Hi. Thank you. I just – just two quick sort of follow-up questions, one on advertising and one on your streaming service. On the advertising side, it's been incredibly strong, which you've highlighted through the second quarter. We’ve seen it industry-wide clearly in your results.

I am curious if you are seeing any cracks in the advertising strength in so far in Q3 just given the delta variant and sort of the recent return of spikes in the pandemic? And then, my follow-up - the question really is just on the Ad Light product that you have that seems so much more profitable in terms of bringing more revenue.

Is that where you're seeing the higher percentage of growth in terms of the new sub apps?.

Thanks so much, Alexia. We're not seeing any slowdown at all at this point, because of COVID, In the aggregate, by the way, as a company, we're now about flat to where we were in 2019, which is a big deal.

So when we say we're up this percent or up that percent versus last year, just versus 2019 in terms of level setting, we're about flat, or just about flat to 2019, which is a good starting point for us now to strive and drive to accelerate off of that.

The Ad Light product is extremely strong, but I don't think that we're breaking out how our growth is in the U. S. in terms of Ad Light versus subscription.

JB, are we breaking that out at this point?.

We are not - we're not. But only to say that, at the end of the day, we're seeing actually still continued healthy growth on both sides on both products. So, it's not sort of one dominant and one we're seeing continued your growth of both. .

Okay. Thank you. .

The only thing I may add on the advertising side, to say the obvious, the comps are obviously going to get a little tougher as we go into the second half, right? So we continue to see a very, very robust market robust demand. No signs of the COVID break, but obviously, we're now comparing to a slightly higher baseline in 2020.

And we also across the market, obviously had a little bit of a tailwind from political advertising as I pointed out earlier. So those are the two factors to keep in mind. .

Okay. Thanks. .

Thank you. And that concludes today's conference. Thank you for joining Discovery Incorporated Second Quarter 2021Earnings Conference Call. You may now disconnect..