Ladies and gentlemen, thank you for standing by and welcome to the Discovery Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all lines are in a listen-only-mode. After 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 and welcome to Discovery 's Q3 earnings call. With me today is David Zaslav, our President and Chief Executive Officer. Gunnar Wiedenfels, our CFO, and JB Perrette, President and CEO of Discovery Streaming International.

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 about 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 end in December 31, 2020 and our assessment 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 all for joining us. This continues to be an exciting and busy time here at Discovery across a range of business initiatives and strategic planning for the next year and the years ahead.

I'm very pleased with our focus, performance, and strong operating discipline as we simultaneously ramp up our integration planning, strategic reviews, and approach ahead of the WarnerMedia merger.

We are increasingly enthused about the transformative opportunity ahead for our bringing together these complimentary assets, talented creative leaders, and employees all around the globe.

This morning, I will provide some brief commentary on Q3 operating performance and update you on the progress we are making as we work toward the close of our transaction and integration of the businesses. Gunnar will then take you through additional puts and takes on the quarter. Very briefly on Q3, it was a solid quarter all around.

Subscriber growth for our direct-to-consumer platforms picked up nicely post summer. And we added a healthy 3 million paying subscribers around the globe, reaching a total of 20 million subscribers. And we've seen continued growth thus far in Q4.

We were able to deliver this growth as well as driving double-digit growth in both advertising and distribution revenues while converting a healthy amount of OIBDA to free cash flow. This positions us nicely above our guidance of at least 50% conversion this year. And we see free cash flow is tracking to exceed $2.1 billion for the full year.

And that after funding very significant investments in our Discovery+ rollout. Additionally, and importantly, we have had the opportunity to refine some of our transaction leverage assumptions after examining WarnerMedia's draft carve out financials. Though we took a conservative approach initially, while modeling the proforma transactions.

We now expect our net leverage at close to be at or below 4.5 times versus the 5 times that we noted in May. And we are currently tracking below the 4.5. This is predominantly based on estimated contractual adjustments to working capital and, to a lesser extent, an improved outlook in our operating performance.

Accordingly, we now see a path to reducing leverage to around three times meaningfully sooner than what we articulated in May. More on this shortly from Gunnar.

But this points to a stronger financial footing than we had anticipated as we stand up the merged Company and accelerate the pace to de -lever, supporting our ability to make focused investments and growth initiatives even without any asset sales.

On the regulatory front, echoing John Stankey 's comments on the AT&T call, we are well on track for a mid-2022 close and are engaged in the typical regulatory filing process in jurisdictions around the globe, including our planned filing with the Sankey SEC of a preliminary draft of our merger proxy expected out in late November.

The transformative upside from the merger is, of course, the global direct-to-consumer opportunity.

And while we appreciate some of the questions that a number of you have asked regarding clarity and specifics regarding the product, investment, and go-to-market roadmap, it is still premature for us to provide details given where we are in the ongoing regulatory review process.

That said, having conducted further operational and strategic diligence, I can share with you some broad strokes around what underpins our confidence and enthusiasm in our global go-to-market attack plan. First, it's all about the content.

From the start, under one roof, will be a combination of two companies whose common culture of creative excellence, iconic characters, and franchises will result in a differentiated competitive offering. I believe the biggest and most compelling menu of IP for consumers in the world.

Spanning comedy to true crime, kids and family, lifestyle to adventure, drama to documentaries, news, and sports, and of course, sci - fi and superheroes. I believe the most complete and balanced portfolio offered in one service in the world.

And secondly, we view our ability and commitment to tactically invest in our content portfolio as a critical strategic driver, building upon our respective long tenor track records of producing relevant and complementary programming around the globe. This should help to make our service uniquely global and local, at the same time.

Third, given the breath of our content offering, we expect the combined service will appeal broadly to all demographics, young and old with strong male and female genres. Again, very complementary, such that our global total adjustable market should be on par with the biggest streaming service.

Assessing the overlap in respective subscriber basis, at least here in the U.S., we believe less than half of Discovery+ subscribers are also HBO Max subscribers, which with the right packaging provides a real opportunity to broaden the base of our combined offering.

And with our global appeal, infrastructure, and local market capabilities, our international roadmap is very much still untapped and provide meaningful upside over the coming years.

Lastly, our ability to drive revenue and ARPU positions as well for long-term growth, particularly given our plans to market with a lower priced ad-light service, starting off in the U.S. and later in key international markets. A meaningful distinction from some competitors, where we see an opportunity to drive value.

We gain confidence in the strategic direction from our experience with ad monetization on Discovery Plus in the U.S. where advertisers covet the incremental reach demos, targetability, and product flexibility, and pay premium rates to address this audience, helping make this year our highest ARPU offering.

The opportunity to scale and add light offering represents one of the most significant upside drivers for the Company, long term. While offering a compelling value to more price-sensitive consumers and will benefit from Discovery's depth in local ad sales infrastructure and teams around the world to help monetize.

It's quite clear that the winners in streaming are and will be those companies that can provide consumers with the best quality stories, the most appealing content choices, personalized and simple products, and all at a great value.

We expect our highly complimentary combination will drive such a winning value proposition and will be reflected across key operating metrics over time. A few words on the linear side of the house before turning over to Gunnar.

As we think about what can be achieved in terms of bringing great networks and brands together under 1 roof, the analog to Scripps is a valuable benchmark. And we believe the opportunity is far greater here, both on costs and advertising revenue potential.

Ultimately to better support our core linear business and more broadly, the entire traditional ecosystem. This, I believe, is one of the least depreciated elements of this transaction. Consider with Scripps, the platform we created in aggregating female demos, the bedrock on which we launched Premier.

Our product that offers advertisers the unduplicated reach of broadcast network across all of our prime-time originals at significantly more efficient CPMs than broadcast. We can take that advertising platform to the next level by weaving in sports, scripted news, and male-oriented programming together with our existing core competencies.

It's a true win-win, generating significant revenue upside to us with improved options, efficiency, and savings to our advertising partners by replicating the reach of a broadcast network at better value. Cost synergy opportunities are significant.

We draw upon the expertise of our transformation office, which since our merger with Scripps Networks in 2018, continuously challenges our management team and me, to refine and transform how we conduct and manage our organization from top to bottom around the globe. Nothing is sacred and no stone is unturned.

With scripts, we ultimately captured more than 1 billion in cost savings, representing about 35% of all non-content expenses. And about 3x our original synergy target. Before we stop the attributing incremental savings to the merger.

A large chunk of the cost synergy opportunity that we have already conveyed speaks to the best practices in tailwind in place from the integration of Scripps.

It's a great starting point as we refine and integrate Global Ops, enterprise tech, corporate functions, real estate, direct-to-consumer infrastructure and tech, and streamline efforts across duplicative functions like SG&A and marketing spend, a process that we see broken down into three distinct waves over the next few years.

We approached $3 billion in cost saves, as a tangible and achievable goal, especially against the combined Company that should spend around $35 billion this year. And growing from there. Stepping back for a moment to reflect on our direct-to-consumer pivot nearing a year since Discovery+ launched.

I'm proud of what we have accomplished under the leadership of JB and the world-class team we have assembled over the last few years. We continue to learn a great deal, challenge ourselves, sharpening our focus, and gaining perspective for the next leg of our direct-to-consumer journey with WarnerMedia and HBO.

And as we've noted recently, we continue to refine our Discovery+ plans, taking a more thoughtful and tactical approach to investing in the product and doing so in ways that also support our plans for the combined. Company after we closed the transaction. For example, we are moving forward in priority markets such as Canada, Italy, Brazil, and the UK.

Some of which were HBO Max hasn't announced plans or in some cases has indicated that they cannot launch in the near to medium-term for contractual reasons. As you heard from John, Jason and the team on their earnings call, HBO Max continues to aggressively move forward with their global expansion plans. Most recently in LATAM and last week in Europe.

And we look forward to closing the transaction so that we can coordinate and maximize our marketing, technology and content spend for the enhancement of the combined effort. Until such time, we continue to roll out new and exciting content to entertain and sustain our subscribers around the globe. And our metrics look great.

Roll -to-pay remains near 75% globally. Churn, particularly in the U.S., to continues to look strong and approaching peer group lows, while App Store ratings are firmly at the top, while monetization and engagement continued to exceed our expectations.

All of which helps to solidify our Discovery+ base as we endeavor to roll into and formulate a more comprehensive and broader offering with HBO Max. In closing, this is an exciting and dynamic time for us as we plan our next steps. And we are as eager to share them, as we know you are to hear them. And we expect that will be in short order.

While the opportunity for course capture and enhanced efficiency is both tangible and material, our Northstar, our right to play, will be in achieving long-term sustainable financial growth resulting from the combination of these two great content companies.

helping to nurture our important linear presence while driving global scale across our direct-to-consumer platform, anchored by as rich and relevant a portfolio of creative franchises anywhere in the world. I'd now like to turn it over to Gunnar. Afterwards, JB Gunnar, and I will be happy to answer any of your questions..

Thank you, David. Good morning, everyone, and thank you for joining us today. Reiterating David 's comments, I'm pleased with what the Discovery team has achieved since the Discovery+ Analyst Day not even a year ago.

Over that time, we have added 15 million paying direct-to-consumer subscribers globally, finishing the third quarter with 20 million paying BBC subscribers. Since the start of our Discovery+ journey, we have launched an over 25 new markets, notably the U.S. and the UK. And most recently Canada and the Philippines.

With Brazil to come over the next few weeks. At the same time, we have continued to drive growth in markets like Poland, the Nordics, Italy, and India, where we doubled down on our direct-to-consumer efforts with a renewed and expanded content offering.

I know our next-generation revenues finished the third quarter with $425 million for the quarter or a $1.7 billion annualized run rate with global D2C ARPU of approximately $5 and $7 blended Discovery+ ARPU in the U.S. Again, supported by our over $10 ARPU for the Discovery+ Ad Lite product, which continues to monetize very well.

Investment losses for the quarter were in the low $200-million range, slightly better than our guidance from last quarter. And we expect investment losses more or less in that range in the fourth quarter as well. As always, we maintained a disciplined approach with respect to investing in direct-to-consumer initiatives.

As both David and I have noted over the last few months, it is through this lens that we view the opportunity ahead, both leading up to the marker and beyond. We are very focused on nourishing our existing subscriber base with an increasing content offering and new product features.

At the same time, you should expect us to be guided by a rigorous analysis of customer lifetime value at subscriber acquisition costs to determine our marketing spend for new sub additions. And now I'd like to quickly review our reporting segments. Starting with the U.S., third quarter advertising revenues increased 5% year-over-year.

Pricing was healthy versus last year driven by scatter pricing that was up 40% year-over-year. Additionally, we continue to see strong demand for our Discovery+ ad light product, which contributed to the growth in the quarter. This was partly offset by weaker audience delivery year-over-year.

Some of it attributable to the Nielsen panel issues, as well as the lapping of our very strong performance last year during the pandemic. Furthermore, some of our networks have lost share to the strong sports calendar this year.

While scatter pricing is still very healthy in Q4, up 30% to 35% over both upfront and last year, the overall tone in the market is a bit more subdued than last few quarters as clients worked through the constraints in the global supply chain.

And though there is slightly less visibility as a result, we are very pleased with how our portfolio is positioned based on the strength from the upfront and contribution from direct-to-consumer.

Distribution revenues increased 21% year-over-year, largely due to the continued growth of Discovery+ as well as linear affiliate rate increases, in part, helped by successful renewals with DirecTV, Verizon, Hulu, and [Indiscernible] so far this year, As disclosed in our earnings release, Pay-Tv subscribers to our fully distributed linear networks declined by 3% year-over-year, while total portfolio linear subscribers declined 4%, excluding the impact of the sale of our Great American Country network last quarter.

Turning to international, which I will as always discussed on a constant currency basis. International advertising increased 26% versus last year as the global advertising marketplace continue to recover from the pandemic. We also benefited from the Olympics in Europe across our linear and digital platform.

Although as we've noted in the past, advertising for the Olympic Games is less consequential in Europe as compared to the U.S. All of our international regions, including many of our key markets like the UK, Germany, Sweden, Norway, Spain, Australia, and New Zealand, and Mexico were up meaningfully compared to last year, as well as compared to 2019.

We see momentum continuing into Q4, even as needless to say, the year-over-year comps get tougher from here on out.

International distribution revenues grew 6% during the quarter, primarily due to the growth of direct-to-consumer subscribers, which have nearly tripled over the past year across our footprint outside the U.S., in part aided by Olympics sign-ups.

Turning to operating expenses, total Company OpEx increased 50% during the quarter, or 17% excluding the Olympics, for which the overall EBITDA losses were in line with our guidance of around $200 million for the quarter.

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. Turning to some housekeeping items, net income for the quarter was $156 million or $0.24 per share on a diluted basis. A couple of items to note.

First, we recognized a 12-cent per share, non-cash gain from the $15 billion of notional interest rate hedges that we recently implemented to mitigate interest rate risk for future debt issuances to finance the cash portion of the WarnerMedia transaction.

The hedges provide additional security and visibility towards our overall cost of deal-related debt financing, which is now trending better than our initial expectations.

And a final note on this, as the derivatives do not qualify as hedges for accounting purposes, we are required to report the changes in fair market value on our income statement, which could result in some additional variability to our net income until the WarnerMedia transaction closes. We will of course, call this impact out each quarter.

Second, the impact of the PPA amortization during third quarter was $0.30 per share. Adjusted for the above, EPS would have been $0.42 per diluted share. Our effective tax rate during the quarter was 15% and we continue to expect the full-year effective book tax rate to be in the mid-teens range.

For cash taxes, we continue to anticipate a rate in the high 20% range for the year, excluding PPA amortization though this is subject to change as we are carefully monitoring ongoing tax legislation.

And we expect FX to have roughly a negative 15 million year-over-year impact on revenues and a negative $10 million impact on AOIBDA in the fourth quarter. Now, turning to free cash flow and our leverage. We generated $705 million of free cash flow in the quarter.

Obviously, a very strong conversion rate of AOIBDA, notwithstanding the continuing investments we're making, as well as the return to normalized content production levels. Year-to-date, our AOIBDA to free cash flow conversion rate is over 60%.

And with a few months left in the quarter, we see free cash flow topping $2.1 billion for the full year, and clearly ahead of our 50% conversion guidance. And to expand on a point that David made earlier, we now expect our net leverage to be at or below 4.5 times by the time we close the WarnerMedia merger.

Over the past few months, having had the opportunity to dig further into WarnerMedia 's draft carve-out financials, and with better visibility on estimated working capital, in conjunction with our better P&L and free cash flow performance, we now believe that we will have a healthy amount less net debt at closing than originally anticipated.

While naturally, these metrics are preliminary and a function of working capital up close, we now do expect to be in a position to reduce leverage to 3 times meaningfully sooner than what we stated in May. Our long-term target net leverage range for Warner Brothers Discovery remains at 2.5 times to 3 times.

As we work towards closing the WarnerMedia transaction in mid-2022, we have re-erected our experience, integration, and transformation office to hit the ground running.

And as we refine our strategic review and integration plans, and as we develop our synergy capture plans further, we are as enthusiastic as ever about the prospects of combining these two world-class portfolios and franchises. With that, we look forward to sharing a lot more in due time.

And for now, I would like to turn the call over to the Operator to start taking your questions..

Thank you, sir. And we will now begin the question-and-answer session. [Operator Instructions] Your first question is from the line of Doug Mitchelson from Credit Suisse. Your line is now open..

Doug?.

Mr. Doug Mitchelson, your line --.

Okay..

-- is open..

He only responds when he is addressed as Mr. Doug Mitchelson. Okay. Sorry, Doug..

A hundred [Indiscernible] I still can't figure out the mute button. Look, David, I appreciate the update on the merger and the lower debt leverage. Can you talk about the content vision for the combined Company and how that's evolving? I guess it’s a three-part question, David.

The first is Warner Brothers investing enough now in content under AT&T while they're focused on the merger.

How are you thinking about how much content spend should be to women in global streaming versus how much the companies are spending today? And do you have visibility on what Warner's making that's going to be coming out in late '22 and '23 and '24 since movie, in particular, is a 2 or 3, 3-year cycle? Any thoughts on that would be helpful.

Thank you..

Thanks Doug. First, this is something John Stankey and I talked about us. We created this vision together of this Company being what we believe is the best media Company with the greatest and most comprehensive content offering. And as part of that, we're spending more money on content and leaning in.

And WarnerMedia is spending more money on content and leaning in. We both committed to do that to keep both of our ecosystems nourished and strong and growing. So, when the deal -- when and if the deal gets approved, then we come together, we'll come together with strength.

And you see that with on the Warner side where we're cheering them on with the success of Dune around the world with Ann and Toby on that side and Casey Bloys having an incredible run at HBO with Succession, Light Lotus, Hacks, Mare of Easttown.

It's just if you look at the culture and the impact of that content, together with the extraordinary library they have, us leaning in on our side with more original content. And so, for us, we're also spending a lot more on the international side to get ready. We think that's a strategic advantage.

And when you look at the content, we think in terms of the demographics that we will appeal broadly to every demo. I mentioned this, but it's very strong with women. That's a particular strength of Discovery where we're during many quarters with a leading media Company in America for women. Together with length of view of women watching our channels.

Whether it's Food or HG, or Oprah, or ID, and TLC and that's continuing. In addition, we look around the world, it's not just local content, but we're the leader in sports in Europe. They have sports in Latin America.

And CNN is the leader in news with the most compelling news brand around the world and one of the few global, maybe the only global new service, that has the kind of resources around the world in news gathering.

And so, as we go out and build this service and make this offering, and I do think it's the best content wins, there's a great product in Netflix, in entertainment, there's a great product with Disney, with Chapek (ph) is building, with entertainment. And we think we have a comparable product, maybe even more diversely attractive in entertainment.

But on top of that, we also have sports, which we're using in Europe and learning a lot from. And in markets like Poland, where we're doing news and sports together with broad entertainment and nonfiction, we're finding real meaningful traction and real reduction in churn. And so, I think we have a lot to learn, but we have a terrific product.

And we're working on our go-to-market. We have brought on an old friend of mine, who I've known for 15 years, one of the most talented people I think in the business.

He's busy with a lot of other things, but we do have a commitment now that Kevin Mayer, who built Disney+, will be in the car with -- as a consultant with JB and I and Bruce and Gunnar and the whole team. As we've already built, as we've talked about a go-to-market strategy. We're going to be honing that. Kevin has a big brain.

He's learned a lot about this. We've learned a lot in Europe and with Discovery+. We've been at it for a long time. But he had a lot of success at Disney. He's super excited about getting in the car with us and helping us with everything that he's learned.

A lot of knowledge about windowing, about so, how different pieces of content, whether its movies perform. We're anxious to get in a room with Anne and the team at Warner. I was there last week meeting for the first time with Anne's whole team, but they're super smart over there.

And so, we think adding Kevin to the overall team is going to be helpful to us. And off we go. I they -- who's got the best menu? I think we got the best menu..

Doug, just one point I would add obviously, so we scrutinize of each other's investment plans as part of the deal discussions. And as we said before, all the financial guidance that we've given around the deal is always assuming a pretty significant step-up in content investments over the coming years..

Great. Thank you, both..

Your next question is from the line of John Hodulik from UBS, your line is now open..

Hey, guys. Thanks. A couple of quick questions on advertising. Obviously, a lot of sort of trend going into the fourth quarter, you got the step-up from the upfront, but potentially some slowdowns in supply chain issues.

Dave, is there any way that you guys could sort of characterize what you see going forward on that side and maybe breakout what you're seeing in terms of the linear business versus the DTC business. Thanks..

Sure will. I will just start with this is the most successful upfront that I've seen in my career. I think from an industry perspective, it's up 20.

And it was very materially bigger upfront for us because of Premier and because of the length of view and the certain advertisers wanting to be aligned with the brands that we have and the characters that we have. And so I think it's a big, big helper to us that we had a very strong upfront. There are supply chain issues.

There are putt level issues., but we're still seeing that there will be material growth in advertising. And we can't predict what's going to happen in the future. But as I've said before, I saw a lot of people in the mid-90s saying that it's the end of broadcast television. It may be a transition away from a lot of the younger demo being on there.

But we see huge numbers and we're not getting credit for it. But I think one of the reasons why the ad market was up so much for us is the advertisers know there's massive audience over 55 watching food, watching HG, watching Discovery, watching ID. And they get those. Right now, they get them for free.

We talked about in the upfront number of us in the industry independently, we're out there trying to get credit for that. But I think that the linear platform is here for quite a long time. And there'll be ups and downs on advertising. But advertisers, they find it very effective to be in linear video, much more effective than others.

And then we have the complemented Discovery+, which is just a huge driver for us in terms of a demo complements and attractiveness.

Now, Gunnar?.

It's fine. I don't really have a lot to add to that, David. We're feeling very, very good about our position, the upfront, the continued contributions from D2C. But I did want to point out a little less visibility and for known regions. But we'll be growing very healthily in the fourth quarter, I believe, from today's perspective..

Great. Thanks, guys..

Your next question is from the line of Jessica Reif Ehrlich from Bank of America. Your line is now open..

Hi. Thanks. I have 2 questions. On the integration on -- I appreciate all the comments you did make.

What is the most challenging area and 1 area of opportunity, and you've actually gone through it at Discovery already in waves But on your technology stack, on your tech stack, can you talk about you transitioned off of the Major League Baseball -- Stemtech, off of Stemtech created your own.

So as you look at combining with HBO Max, but what are the challenges and what are the ultimate benefits and cost savings? And then, second question, David, you said in your prepared remarks that you can make acquisitions without asset sales.

I'm just wondering what pieces do you think you're missing in the combined Company?.

1. Is Gunnar will be the CFO of this Company. He did -- he's done an exceptional job. He led the initiative with Scripps where we said we'd be less than 3.5 times levered two years later and we did it in less than a year. And we said we delivered $350 million and we delivered over a billion. And all of that was just cost not revenue synergy.

He came up with these targets and is quite confident in those targets. And so, Gunnar will be kind of the lead horse here. He'll talk to it. We have a very experienced team here. Bruce Campbell, and JB, and Adrian and I have been together for 25 years. We're looking forward to bringing in some incredibly talented people at Warner.

But when we acquired Universal, JB was the one for Bob Wright and for Jeff Immelt that ran the integration of that entire transaction, which was cable, movies, theme parks with over a 146 work teams and work groups and did a magnificent job on that. And so, we're fully deployed.

We got with -- there's a lot that we can't do now, but Gunnar, why don't I pass it off to you and JB?.

Yeah, and I'll let JB comment on the tech part of your question, Jessica, but again, I mean, from the perspective of challenges, again, as I have -- as I've been saying from the very beginning, we've taken a conservative approach to this and we're very well aware of the size of the checks that were riding here for and this combination.

And we have been careful with our assumptions. So in all the work that we've done since gives me more, more confidence in our ability to deliver or against this [Indiscernible].

As David said, and as I said earlier in the prepared remarks, doing more work now, having transparency into albeit draft, carve out financials for the WarnerMedia car park group. As I said, the cash payment is going to be a significantly lower one from today's perspective, that gives us a better starting point from a leverage perspective.

And as we said earlier, this sort of below 4.5 times leverage that we're seeing right now is to a large extent driven by working capital adjustments, but to some extent it's also driven by our current performance, both for the P&L and the free cash flow being above what we, what we assumed in our conservative agency model that we based our first communication on.

So, again, it's early still. We obviously still can only do so much until we have regulatory clearance. But as we said, the team is up and running. Simon Robinson, our Chief Transformation Officer and his team fully redirected at this now. So that [Indiscernible] the ground running. And I think we're in very good shape.

You are pointing out obviously one of the key questions here with the tech platforms. JB, you want -- why don't you give a perspective on how we're looking at that..

Yes [Indiscernible], it's obviously a big opportunity for us. We look at it as one where we're undergoing right now, essentially an audit of both platforms. And I don't think necessarily the decision as monolithic one. We look at these as multiple different modules that make up all the different components of both their and our tech platforms.

And we have a lot of experience, as you mentioned, in terms of the effort and the work and the discipline required in re-platforming either one to the other -- in one direction or the other. That decision we haven't made yet, but we're undergoing obviously, a significant diligence process to underscore which is the best in class on both.

And it may be a little bit of a combination of those depending on certain modules in the platform that we may apply. And so we think it's actually a great opportunity, because Rich and Jason and the team on their side have obviously spent a lot of time and are investing a lot in upgrading their tech platform as we speak.

We've obviously spent a lot of time and a lot of money doing the same over the course of the last 12 to 18 months.

And as the 2 groups come together, we will have essentially a choice of a what we think will be an incredibly attractive kind of tech buffet that we will look to make the best of both to decide how we move into a common platform going forward..

And, Jessica, maybe just 1 -- I just want to clarify one thing, Jessica, because if I understand your question correctly, you were referring to acquisitions. That's nothing that we said in our prepared remarks. And just to clarify, we're not anticipating or planning for any acquisitions at this point,.

David was really clear. It just gives you opportunity.

And but just maybe, I just wanted to follow-up on the -- does it take a lot -- you've gone through this as you said already, with Stemtech, can you just talk a little bit or give us any color on what the cost savings will be from combining and what the benefit are from having one platform?.

Well, there will be meaningful cost savings from coming combining into one platform. I think there also will be meaningful consumer benefits from combining into one platform.

And I think the other thing to keep in mind is yes, part of what in David's comments about us being more disciplined and tactical at this stage of phasing the further rollouts of Discovery+, for example, is also a view towards -- we may be able to more quickly in markets where we may not have launched Discovery+, to be able to quickly fold -- more quickly fold the content offering into a joint platform at that stage versus having to re-platform 2 existing platforms in a market into 1.

And so I think speed to market will be a variant of both -- Where we have and haven't launched. Number 1 and number 2, while we -- the final decisions on exactly which parts of the tech platform we migrate to will influence how long it takes us to get there.

But remember that there may be two phases to this, where there may be an initial phase, which allows for more of a quick bundling of services. And a second phase, which eventually allows for, obviously, a common service on one tech platform.

That's the timeline and evolution certainly [Indiscernible], that we'll talk more in detail as soon as we can give you more color..

But maybe if I can add one thing, Jessica. What we said when we first announced this deal was remember there's roughly $6 billion in technology and marketing spent between the two platforms. We're assuming growth. We brought together two companies with significant expansion plans.

A lot of that spends is, by its nature, a fixed cost relatively independent of the subscriber number. Obviously, there's a streaming-related cost that's there, but a lot of it is fixed. And so, there's a huge opportunity to completely to duplicate that spend base.

And to JB 's point of multiple waves, especially on the marketing side, I have no doubt that we will, out of the gate, even in the first phase before fully aligning tech platforms will be able to get a lot of leverage out of the combined marketing spend..

Thank you so much..

Your next question is from the line of Alexia Quadrani from JPMorgan. Your line is now open..

Just a couple of questions if I can.

How do you think about growing sort of local content following the success you've seen by others with that strategy? And then secondly, really on the new side, is it better to have sort of standalone new streaming service in your opinion, or combined it with entertainment streaming?.

Thanks, Alexia. One of the real advantages of Discovery is for 20 years, we've been in-market with local teams selling locally, producing local content throughout Latin America, throughout Europe. In Europe, we expanded into free-to-air in a number of markets where we're the equivalent of NBC or CBS.

In some markets, we're the equivalent of like NBC and CBS combined. In Northern Europe and Poland, we're quite big with number free-to-air channels in Italy and Germany. And we have a library that's meaningful in each of those markets. And we have a lot of data on what people are watching.

We have a good sense of what kind of content they're looking at on the direct-to-consumer platforms because we've been at it for a long time. We also have sports in Europe. And we've tried a lot of things, some haven't worked out as well as we'd expect.

And that's a good thing because we've learned that sometimes packaging the sports independently doesn't work as well as packaging it more broadly. Number of sports together, reduces the Churn significantly makes the appeal higher. When you put sports together, with entertainment together with non-fiction, we came out with the Olympics.

We had a million-plus sign-ups for the Olympics. And so, we continue to learn. That's a good thing. We're continuing to invest, learn, and grow. That's what John, and Jason, and Ann e, and the team is continuing to do on a parallel basis independently. But as we come together, we'll all be smarter.

You look at what people thought about windowing of just as a student of this and the meetings I'm having, what's the right window in strategy? What works best for direct-to-consumer product? Is it better to have to build up a movie in the theater and then bring it? Is it stronger on the platform if it goes day [Indiscernible] Is it stronger if it goes day? [Indiscernible] at $30 versus free? There's a lot that we are learning just as observers.

And there's a tremendous amount that Jason has learned and Ann and Disney has learned and that the industry has learned. And one of the great benefits for me is I have this ability to really listen. And also, this has been a great experiment in how people are consuming content.

And when people come on for a movie or series, how -- what's the reaction? A lot of what is on the Warner side, I haven't seen, because at this point, we can't see it. But the general industry knowledge and trends are things that we're noting aggressively and we're learning from, and we're continuing to experiment in Europe.

On the news side, we've been experimenting ourselves. And in Poland, we went independent. Now we're packaging it together. I think it's going -- it is probably going to depend on the market and it depends on the offering. We have a very, very strong service in Poland and it's been very helpful to us.

We're one of the leading voices in the market, and we have a 24-hour news channel there that's quite compelling. We don't know what's the right answer yet. But having news and sports -- news is some -- the more people go to a direct-to-consumer product, the lower the churn. The more time they spend, the lower the churn.

It's why we're so excited about how much time people are spending with Discovery +, which has a library that's being broadly viewed. And the idea that people spending hours on that product and the churn is low is encouraging for what bodes for the combination of the two.

But as people, if you could put news or sports and people also go regularly for that, it's another reason to have the service. It's another reason the value the service. It's another reason not to churn out of the service and Disney has been very effective in doing packaging of services. We don't put them together, bundling.

And that's the current plan right now for CNN, as we've read about it. And so it's exciting and we'll look and see..

Thank you very much..

Your next question is from the line of Kutgun Maral from RBC Capital Markets. Your line is now open..

Good morning and thanks for taking my questions. I wanted to ask about DTC investments for standalone Discovery and then drill in a bit on the deleveraging comments. So first, given the deal, it clearly makes sense to take a more disciplined approach to your DTC strategy. I assume this will drive some near-term financial benefits.

So, can you provide a bit more color on the DTC investment levels going ahead? I know you called out the low $200-million range for Q3 and Q4.

Where are you seeing some opportunities here? And is that a good quarterly run rate through deal close, or can the losses continue to maybe narrow given the strong top-line trends? And then just second, accelerated path to deleveraging post deal close is very encouraging.

Is there any more color you can provide on the drivers for both Discovery standalone where you continue to deliver robust free cash flow and then on the pro - forma outlook? Just Gunnar, it's fantastic to hear about your continued role here, and I know you provided a lot of details already.

But any more specifics on the improved pro forma leverage targets, particularly if there's an updated view on pro forma EBITDA, given maybe some minor asset sales from the WarnerMedia side. Thanks..

Great. Thank you, Kutgun. Let me start with the delivering piece here and give a little more color. Again, the -- there are two things that we have updated.

1 is sort of our model of how we look at pro forma combined in financials for the Company, and number 2 is just flowing through our current performance, and that's, by the way, linked to your first question as well because we're just doing a lot better and we're generating a lot more free cash flow than what we anticipated half a year ago.

But if you take a step back, the challenge here is that WarnerMedia is not a standalone Company, but is a carve-out group.

We obviously made certain assumptions about what the balance sheet of that Company and carve-out group would look like, but had to wait for some still draft carve out financials to get full confidence in the financial setup of that combined entity.

And accordingly, what we put into our model and what I presented to rating agencies for the rating discussion was a conservative model not fully flowing through certain adjustments. The most important, one of which is the working capital adjustment. So, we have always talked about the $43 billion as subject to adjustments.

And that's the working capital adjustment from today's perspective that looks like it's going to be $4 billion, $5 billion lower in terms of what the net payment is going to be will have an impact on the net debt balance that we're going to start this Company with. And then, that has obviously a very significant impact on leverage.

So, the second thing though, is about 25% or 30% of this improvement here is just driven by our better operating performance. Obviously, better OIBDA improves the denominator of that leverage equation, and that's developed very nicely as well. And I do want to caveat this. As we said right now, it looks a low 4.5 times.

This number is going to move around with working capital. But what's not going to change in my view is the very significantly increased confidence that I have in our ability to very, very quickly deliver below the 3 times and the very quickly get us into the long-term comfortable leverage target range.

And, again, the other point I want to keep pointing out is we have already got a lot of questions on this. We have already dissipated very significant re-investments in our business case.

To your first question, on the D2C investment, I'll let JB talk about some of the opportunities a little more because we do have, obviously, the Olympics is coming up and market launches kicking in here. But you're right in general. We've always looked at and we will continue to look at capital allocation through the lens of risk and return.

The return side is almost fairly easy in this space because it's just the relationship between customer lifetime value and subscriber acquisition costs. And it is fair to say that -- ask the marketing teams to give us a bit of more cushion between the 2 in order to manage some of the uncertainties as we go into the scenarios for next year.

So you're right, we should see lower investment losses, especially if you keep in mind that the beginning of next year we're starting to comp against the various significant investments that we made in the first quarter of 2020 as we launched the U.S. product.

At the same time, I also do want to point out we're continuing and as David said, we're continuing to really nourish the existing subscriber base that we have. We're continuing to invest in content in a significant way. So keep that in mind as well over the next few quarters. We will continue to see content expense coming up.

We're also continuing to invest in technology and product features. But just a little less focus, I would say in the mix on necessarily driving for every last subscriber.

JB?.

Yeah. And the only other thing I'd add, Gunnar, is obviously, as we approach the deal term, not surprisingly, many of the partners that we work with internationally that have been a great part of our success.

And that you've heard us talk about also asking the fair questions about how much money and how much effort they should put behind launching a new market as we go into 2022, given questions about the future brand and the future product offering, etc.

So, we're getting the same questions from partners, which is totally legitimate and that is making us, in some cases rethink when is the right time to launch? And a lot of that is largely when they're -- those things are being pushed off is a pushing off a marketing, and in some cases, content expense to later when we have a better view of what the combined product will look like.

And we can come back to our partners with them more definitive sense of when and what we will be launching together..

That's great. Thank you, both..

Your next question is from the line of Rich Greenfield from LightShed Partners. Your line is now open..

Thanks for taking the question. A few months ago, WarnerMedia left behind its own channel platform. I think they've joined Disney, Netflix, Hulu, even Apple TV Plus.

[Indiscernible] we're just looking at [Indiscernible] they were just looking at the DTC subscriber business and wanting to be in a fully direct relationship versus sort of a whole down relationship with Amazon. But I think that's sort of puts Discovery by common stars as sort of the 3 largest players on Amazon channels.

Again, sort of David, your perspective big picture hasn't been about the puts and takes of Amazon, whether going fully independence is something you can see Discovery's future, or whether you think companies like WarnerMedia had been in the state not working with Amazon channels and just be curious how you think about that and then just lastly, including calendar on Varick, are you planning on keeping more HBO Max, and Discovery+ separate with that sort of the bundling comments you were making or is that decision of integration still not made.

That would be along faster..

Thanks, Rich. We have a go-to-market strategy that we feel that we've built. I think having Kevin Mayer in the passenger seat with JB and Bruce and I, and eventually with the Warner team, with all of his knowledge and expertise, haven't built and driven Disney+ globally I think will help to finalize and fully inform our strategy.

But we're -- given where we are on the regulatory process, we're just not ready at this point to share all that with you guys. We will -- we expect to and we will soon.

JB?.

1. We have found so for that hit -- there is a -- the question about these channel stores bringing in a different customer base than what we might be able to address directly is an ongoing question, and we certainly seen some good incremental subscriber growth coming from that channel store ecosystem.

And how much of that is cannibalistic versus what we could do direct or not is an ongoing set of analysis that we have going. And obviously, we want to compare notes with the HBO team at the right time. But that's a question --because ultimately, we want to try and get our products out to as many consumers on whatever platforms as necessarily.

The second is the data element and the customer relationship, which I think is a little less known. And I think as some of the Amazon executives have talked about publicly now, we do have access to customer information as part of our relationship.

And that's an important differentiator that doesn't make this just a traditional anonymized channel store relationship but where we actually have customer information on the channel store consumer. And so that makes the equation a little bit different.

And so, you overlay those two things, and we say, the third thing is obviously, we want to have more engaged conversations with the Warner team and look and see whether the strategy that they're following today or the strategy that we're following today makes sense for the combined and the Northstar will be two things, which is ultimately how do we get the product getting in front of more consumers in aggregate? And how do we do it in a financially strong way? And if we think we can deliver a -- still get the customer relationship, but get in front of more people with the right economics.

I think it's one that we will certainly remain very open to. So, we haven't made a decision definitively, but we are remaining very open and we'll certainly that will be part of the story when we come back to so, you, Rich and the team, we'll tell you more about it at the right time..

Very helpful. Thank you..

Your next question is from the line of Steven Cahall from Wells Fargo. Your line is now open..

Thanks. Maybe -- Gunnar, thanks for that color on the lower leverage and the expectation for the merger. You also mentioned that you're having some pretty encouraging conversations raising the debt. So I'm just wondering if that's going to come in a little cheaper.

And I think you gave some steady-state guidance of around 3 times for the combined Company initially and getting there in about two years.

Should we assume that you get there a little more quickly just because you're going to be starting from a lower base, or is it more that you'll just have a bit more flexibility starting from that 4.5 times or below? And then maybe one for JB on Discovery + and NextGen, is it logical for us to assume maybe just a little bit slower pace of net adds going forward as you take a more focused approach and void stepping into places where HBO is strong and be a bit more selective.

And if that is the case, I'm wondering if there's some free cash flow benefit that near-term strategy just cause SAC expense runs a little bit lower. Thank you..

to be disciplined and get this Balance Sheet in perfect shape.

JB?.

Yes, I think consistent with what Gunnar just said, you we should assume obviously. We are continuing to obviously push and see good growth in the markets where we're in. And we'll be launching our newest market at Brazil here over the course of next two weeks. And so, we're excited about that, and we still see healthy growth out of those markets.

And we're spending at levels to Gunnar 's point that we think are reasonable without leaning too far in. But they slightly more conservative SAC to LTV ratios that we're spending at, plus the slowdown in some of the new market launches as we go into towards the end of the year and into 2022.

It doesn't mean that the net adds numbers will be a little bit slower than they might have been in the past..

Great. Thank you..

And it may be worth just, Rich, I realize we didn't hit Rich 's second question about the bundling clarification. I think David in my point on the bundling was purely that in back to Jessica's question about the tech rollout, it will take a bit of time, no question to come to 1 platform.

And so while that process is underway, there will be opportunities in a much quicker fashion, closer to day 1 to potentially do some very creative bundling propositions. That is a interim strategy, not a long-term strategy, I think at this point is what we'd say..

This will be our last question from the line of Ben Swinburne from Morgan Stanley. Your line is open..

Thanks. Good morning. I think the release noted renewals with DirecTV and Verizon during the quarter, I'm just wondering if you guys could give us a little bit color on the key takes there and whether you see healthy affiliate fee growth coming out of that or any changes in packaging.

And if the merger impacted how you approach those deals, given, David, you've made that point that bringing the Turner networks in as a real underappreciated asset and part of this transaction. That's my first one.

And then I just wanted to come back, David, there's obviously a lot of focus on the merger and including your management team that you're putting together. Congratulations on bringing Kevin on board.

Is that -- I don't know how much you can say, but is there hope that that converts from a consultancy to an employee ship? And I'm just curious if you still going to remain Chairman of Dezelem, which I think is, at least in some regard, a competitor to you guys in Europe. Thanks a lot..

Thanks. Len Blavatnik is a very old friend and he's out he is he worked with me and Kevin and providing the opportunity for us to get a good amount of Kevin's time. But he is fully committed to LAN and the zone and he's doing some other things as well. He's driven down all these paths.

And he's a great entrepreneur and he's got a number of really exciting things he is doing and working on. This is one of them. And I think it's going to be really helpful to JB and I and Bruce.

And he's is having a great time doing what he's doing, but he's super excited about really coming in and giving us the full scope of his experience and brain on everything he's seen and learned. And working with LAN has been a good thing. I think he's seen and learned more about Europe and sports and -- so I think that's exciting.

The team at Warner and the way they're growing, the knowledge, the capability there, the attack plan that they have is really impressive, and the [Indiscernible] super strong. If you look at the strength of that product, you look at the strength of our product. So, I think, we've got a lot of really good people.

You've seen through the hits for our history with Scripps that we're really about who are the best people. I think we're going to have -- be able to build a really strong team and bring in some outside experience as well; but it's really encouraging how well they're doing and what we are learning along the way, and that's a big helper to us.

On the affiliate side, Gunnar, you could fill in some more. But I think we reached deals that were very favorable for us on the carriage side, very strong. And I think it's win-win. They want to commit to carry all of our channels. And this whole idea that a bunch of our channels are going to get dropped, that never happened. They're good value.

I don't say that with great glee, but when you look at the overall package and, on the viewership, we're a great value. And they're making a lot of money selling our -- selling advertising on our services. So, it went very well for us with meaningful increases and real security and I think well for them and continuing to get really good products.

And in terms of how do we, how does this align with Warner has nothing to do it. We're operating as an independent Company. And we're operating on the strength of the channels that Kathleen Finch and Nancy have been building here with Discovery, and Oprah, and Food, and HG. And so, we've been over-delivering. People love our stuff.

And it's just a reinforcing of this narrative that despite the fact that the world is changing, that we were able to get deals with some of the toughest and strongest and most knowledgeable distributors on very favorable terms with strong carriage commitments, as we make this transition together, and so I think that's a very good sign for the two sides.

Gunnar, anything to add?.

Just obviously, the caveat that we don't call the support or we don't control the subscriber trends.

So that's always the -- and we have as much visibility into that as many of you on the call here, but I'm very, very pleased with the distribution team's successes this year and we've gotten done so many questions about, sort of, the outlook and we just continue to go through deal after deal after deal with very encouraging results..

Great. Thank you..

Thank you for joining us today. And with that, this concludes today's conference call. Thank you for attending. You may now disconnect..