Warner Bros. Discovery, Inc. (NASDAQ:WBD) Morgan Stanley European Technology, Media & Telecom Conference 2022 November 17, 2022 8:50 AM ET
Company Participants
Gunnar Wiedenfels – CFO
Conference Call Participants
Ben Swinburne – Morgan Stanley
Ben Swinburne
Okay, we’re going to get started everybody. Good afternoon. I’m Ben Swinburne, Morgan Stanley’s US Media Analyst. Quick disclosure, please note that important disclosures including personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in the registration area and on the Morgan Stanley public website.
We’re really happy to welcome back to the conference, Gunnar Wiedenfels, who I guess now for the first time is appearing as the CFO of Warner Brothers Discovery, which is a company put together with the merger of Discovery and Warner Media earlier this year. Gunnar, thanks for being here.
Gunnar Wiedenfels
Thank you for having us.
Ben Swinburne
Good to see you. So, I guess we’re eight months in to the merger. It’s a pretty wild time in the state of media at the moment and the macro. Maybe just stepping back with the benefit of the eight months that you’ve now got this combined company put together, how would you describe sort of the opportunity ahead?
Gunnar Wiedenfels
Yes, you’re right. I mean, there was no shortage of changes since we first started discussing this deal and where we are today. A lot has changed in the streaming ecosystem media overall. But net-net, I think it’s going very well and the opportunity is as great as it could be, and I’m really, really excited about the progress we’re making. We’ve obviously made a lot of decisions very early on after we brought those two companies together, and it really comes down to the three core priorities that we’re working towards. One is making sure that we continue creating this world class content across all genres. We’ve got scripted, unscripted, news, sports, that we enable that storytelling to happen on one of the most complete global distribution platforms you can find, regardless of geography, platform exploitation window. And maybe most importantly, and maybe the biggest difference after bringing these two companies together is that we’re managing all that as one company, not individual business units, but an entire team, 40,000 people rowing in one direction for the benefit of the combined company. And we just took up our synergy target on the third quarter earnings call because we’re making a lot of progress, more than 1,000 initiatives in the pipe. And it feels really good because the team is coming together and there’s a lot of excitement inside the company.
Ben Swinburne
So, when – I guess it was, I guess May of last year when you guys announced this transaction. I think at the time, at least my perspective was this was very much about direct to consumer and streaming and sort of the combined scale and winning in D2C. That whole business outlook has certainly shifted quite a bit since last year. Are you and David and the team looking at streaming with a different lens today than you were last year when you think about the path ahead for Warner Discovery?
Gunnar Wiedenfels
Ben, I would say more so, the market has changed the lens because I would describe it a little more – in a little more nuanced way. Clearly the D2C area for this combined company is going to be the most important growth driver going forward, but what’s already differentiated the way we have looked at Warner Brothers Discovery when we announced the deal from everyone else, is that we did not position the company as a D2C platform with a conveyor belt of mass content flowing and to drive that platform. But we have seen the opportunity of Warner Brothers Discovery as one integrated media platform, being able to use all the revenue streams and cash registers across an entire ecosystem. And I think the market has come to that conclusion in the meantime as well. So, very, very important strategic growth driver, very important source of synergies because we are going to combine two technology stacks into one. We are going to be able to much more efficiently and effectively market that D2C product, and all our products with the combined company footprint, but not the end all, be all purpose of the company that exists.
Ben Swinburne
So, you’re saying it’s not you that’s changed. It’s us that’s changed.
Gunnar Wiedenfels
You have changed, yes.
Ben Swinburne
I mean, there’s so many different ways to monetize and distribute IP, and Warner’s got content all – in lots of different places and lots of different – from lots of different studios. Have you arrived yet at a sort of, here’s the approach, or is it going to be something that’s sort of organically evolving over time?
Gunnar Wiedenfels
Well, I think we have arrived at, here’s the approach, but there’s a lot of execution yet. One thing that I really prioritize is making use of all that information, all that data we have across the company that wasn’t in place before. It was a very much business unit by business unit-driven landscape and decision-making approach. We’re now bringing David’s entire leadership together, and we’re looking at all the information we’re having. We’re looking at areas where we don’t have the data and we make informed assumptions, but we make, for example, windowing decisions in the best interest of Warner Brothers Discovery as a whole. And some of the movies that have launched since we combined the two companies, are great examples where the ultimate estimates have come up over time because we were able to keep them in the theater a little longer and leverage that marketing buzz that a theatrical opening generates through the entire value. And it’s non-rocket science, right? That’s how it’s been done successfully for a while. And the idea of collapsing all that into just one streaming window in retrospect is a failed experiment.
Ben Swinburne
Yes. So, when we think about the landscape, you’ve got someone like Sony all the way over on one end as the “arms dealer.” You’ve got sort of Netflix, everything is streaming all the time. Warner Brothers Discovery sort of fall somewhere in the middle. Are you – are there more than those two choices when you think about running the company over time?
Gunnar Wiedenfels
I think there are. If you think about the priorities that I described, sort of creating the best storytelling in the world and exploiting that across all platforms and managing it in an integrated one company way, why would we not be opportunistic about certain monetization streams? David has talked a lot about FAST as an area that we want to add to the mix here. We’ve got a deep library of content. We know we need to make sure that there’s as little in the way between you consumers and our content. And we’re not going to tell you whether you have to come through our own app or whether you want to come through an Amazon Prime video channel, or whether you want to use something on linear. We’re going to be open to all those forms of distribution. And again, I think like no one else, we’re in a position to look at all the learnings that we’re getting across that entire ecosystem and using all that to drive decisions in a way that ultimately allows us to get the best return for every dollar of content spend, and then get that flywheel effect because once we have that distribution ecosystem in place and the proper capabilities to utilize it, then we should be deploying as much as possible into great storytelling and take that around the world.
Great. Maybe one last sort of high-level question, then we’ll dive into the segments a bit. You and I have talked about the biggest probably near-term opportunity for the stock is around deleveraging. And I know that’s a huge focus for you. Tell the room and the audience online a little bit about your expectations around path to deleveraging, the speed, and also a little bit why this year there’s been less free cashflow so far in the first couple of quarters than maybe we were expecting.
Gunnar Wiedenfels
Okay. That’s a number of questions in one. but I’ll take them apart.
Ben Swinburne
You can handle it, I’m sure.
Gunnar Wiedenfels
The – so first of all, I want to make sure – I don’t lose any sleep over our leverage. We’ve got long dated debt, 14.5 years average maturity, very little maturities coming up over the next two to three years. We’re going to generate a multiple of that in free cashflow, even in sort of slightly more stressed scenarios. And most importantly, it’s very, very at attractively priced debt. So, by all means, I think we’re going to be ending up buying back a lot of that long-dated debt at cents for the dollar. So, it’s a great opportunity and we put it in place with a purpose. We put it in place with a structure that I’m very, very confident is not going to become problematic. That said, we are absolutely very, very focused on it because it does come up in every conversation. It’s – on the face of it, it’s a large number, five times leverage, and we’re working towards bringing that down to the upper end of our target range of – we have a target leverage range of two and a half to three times. We’re going to get there over the next 24 months. By the end of 2022, we’re going to be in that range. And to the point – 2024, we’re going to be in that range. And to your point of the free cashflow generation, there’s no doubt right now, quarter cashflow as an example is a little depressed by deal-related expenses, (restructuring) expenses going through. And also keep in mind that we just guided to an incremental sequential $2 billion of synergy capture in 2023 versus 2022. We’ve done the work. We’ve got these initiatives lined up, and a lot of that is obviously going to drive free cash flow into next year. And then there’s a number below the line items there, our working capital opportunities, or the CapEx opportunities. And most importantly, right now the company is operating with a pretty significant gap between content cash spend and amortization that’s going to normalize beginning next year.
Ben Swinburne
Okay, that’s great. Let’s talk a little bit more about the direct-to-consumer segment, which, Gunnar, you mentioned is really the key organic growth driver. So, you’ve got HBO Max and sort of all the versions of HBO around the world. You’ve got Discovery Plus, which you guys have had in the market now for several years. Where does – I know JB is hard at work at sort of what the new service is going to look like, but what can you tell us about the assets you have and what you can offer the consumer once you ultimately get a combined product out to market next year?
Gunnar Wiedenfels
There are two things that really excite me about what we’re going to bring to the market. Number one is the user experience. There’s no doubt that we will create a much, much better user experience with a new clean technology stack and a new go-to-market approach. That’s one. And number two is the integrated content portfolio between what – the great scripted content that HBO does, all the Warner Brothers output, and then the unscripted Discovery Plus content portfolio. And I do think that there’s an enormous opportunity. We’ll have to deliver against that, but the ability to attract to attract subscribers with the tent pole HBO content, and then make sure that we retain them after the end of the season, is a huge priority. And our Discovery Plus content lends itself to that like nothing else. We know for a fact we have very low churn on Discovery Plus. We have very high levels of daily engagement across our content, and that’s always been the core thesis for the quality of that combined portfolio. I frankly think there’s no better content offering in the world than the combined HBO Max and Discovery Plus content portfolio.
Ben Swinburne
Yes. It seems like – and you guys don’t report churn, but it seems like HBO Max churn is relatively elevated, which I find a little surprising just how – given it’s probably got – I mean, my opinion, the best content, you look at the Emmys. It’s not just me. How do you get churned down in HBO? Is it as simple as bringing Discovery in there, or are there other opportunities to drive down churn?
Gunnar Wiedenfels
I agree with you on the assessment of the content quality. It’s amazing. I think there’s two things. One, there’s good churn and bad churn, right? What I would qualify as good churn is the fact that HBO always brings in massive amounts of new subscribers. And naturally, you won’t be able to retain every one of them, right? So, in a way, in an ironic way, it’s a measure of the quality. Yes. So, and that’s there. We’re still working hard on making sure that we have something to offer to those viewers. There’s a lot to be said about content discovery, about guiding the user journey through the product. And a lot of that is going to be part of the new platform. We’ve made some improvements for the HBO Max interface, and have put some measures in place with guiding a better subscriber journey, but that’s a very big factor. And the reality is, the platform right now is just not operating at its best possible performance. There are many people like you, if you look at the app store ratings, that are excited about the content. There’s a lot of five stars for people who are focused on content. There’s, unfortunately, some lower ratings for people that are focused on the app experience. We’ll fix that. Five, six months from now, hopefully we’re going to be in a very, very different world and that we have both ingredients, the outstanding content and outstanding technological user experience as well.
Ben Swinburne
So, on your earnings call, a few – I guess it was a couple of weeks ago, you guys moved forward or brought forward the relaunch or the launch of the super service, as we like to call it, to earlier next year. And it seems like you guys also have a lot of confidence in the financial output of direct to consumer really inflecting. So, talk a little bit about the drivers there, both on the revenue side and the cost side, because it’s a business that, as you and I have discussed, HBO made $2.5 billion of profits not that long ago in 2019.
Gunnar Wiedenfels
That’s right. Yep.
Ben Swinburne
Now it’s losing billions, but take us on the sort of path here over the next couple of years.
Gunnar Wiedenfels
Yes, maybe starting with the financial facts here. If you look at our proforma financials, our entire D2C segment lost roughly $2 billion last year in 2021 pro forma, and consensus for this year is in a similar range. And by the way, I do want to point out, because David was misquoted as sort of saying HBO lost $3 billion. He was referring to the swing from a $2.5 billion profit of billed business over a short period of time into a loss maker. And that’s fine because we’re making investments. We’ve always been clear that we view 2022 as the year of peak losses for direct to consumer. And the path from here is both a revenue and a cost improvement path. And I’ll start with the cost side because it’s so straightforward. We’ve always been clear that that $6 billion non-content D2C spend is one area of enormous synergy potential, and we’re seeing that in our more detailed synergy work. It’s going to take a little while because right now everybody’s fully focused on creating that new product. But certainly, running one clean new technology stack is going to be much more efficient than running two, let alone one that is sort of duct-taped together from a number of legacy systems. So, big, big driver. Marketing efficiencies, we’re already seeing that flow through. It’s actually fascinating what we can do. We have one of the greatest media footprints in the world, and we’re starting to make a dedicated effort to use that to promote our own product. House of the Dragon was a great example. I don’t know if any of you guys saw that, but flying the dragon through the Yankee Stadium, there’s a lot of stuff we can do, and that’s really helping effectiveness and efficiency of our marketing.
And then on the revenue side, again, most important driver is getting that churn number down, and we feel good about the content proposition and the improved user experience from the product relaunch. And frankly, we haven’t gone all in right now from the perspective of driving that – those signups. But, so there is definitely going to be a positive inflection from a subscriber perspective following the new product launch. But there’s also a lot of opportunity from an Oracle perspective. The market has changed a lot, and HBO Max, relative to other competitive products in the marketplace, is now actually relatively moderately priced, despite the fact that there’s no doubt that it’s the greatest content offering in the space. So, there’s opportunity. Specifically, internationally, one interesting data point is that the effective ARPU between HBO Max and Discovery Plus, is really not that different internationally, which is a function of that sort of push to maximize subscribers. But I think there’s a lot of value opportunity there trading off price and volume a little better.
And then I do want to point out advertising, an enormous opportunity. We continue to see our ad monetization in the D2C space trend up, and I think there is more that can be done for HBO Max and specifically a lot more for our combined product. This is an area where we’re really still in the first innings. We’re monetizing very well. We’re getting CPMs that are a multiple of the linear world, but with scale, there should be an incremental exponential benefit in digital marketing. It’s been one of the big growth areas in the ad sales space for us this year and last year, and the year before. And I think it’s going to get incrementally important.
Ben Swinburne
Oh, I want to come back to the ad-supported tier in a second, but just back to ARPU, Gunnar, it’s interesting, right? A lot of your – a lot of services came to market deeply discounted to drive subscribers. If we’re hopefully sitting here together a year from now, a lot of them will have raised prices almost back to the HBO level. What do you guys – what would lead you to raise prices? I mean, you’ve got a lot of work to do on the product side. You also have all the Discovery Plus subscribers as well. But it does seem like financially, ARPU growth is pretty important to making the math work. So, what are the variables? What are the milestones for you guys in terms of evaluating the time to take price on that service?
Gunnar Wiedenfels
Yes, look, I think more important even than ARPU is lifetime value growth, and that’s where churn kicks in, but there’s no doubt, I have conviction that there is pricing upside. I went through some of the reasons earlier, and we haven’t made final decisions yet partly given how goal posts are moving in the industry right now. We’ll go as close as possible to the actual product launch. But again, from the content perspective, this is the top product in the market.
Ben Swinburne
Yes. So, let’s talk a little bit more about advertising. You guys have been in the market now with an ad-supported tier. Prior management team launched that. I think David made a comment on the last earnings news was called that maybe there have been fewer of the HBO Max customers taking that service than maybe he guessed or what was expected. There’s a lot of focus on this part of streaming right now. What do you need to do to really succeed in ad-supported streaming, both from a consumer adoption point of view and also an advertiser point of view?
Gunnar Wiedenfels
Well, generally speaking, you could argue we should almost be indifferent whether people want to go for a premium price ad-free subscription, or for a slightly discounted ad-light subscription that allows us to make up the delta. Right now, it’s actually a little more than the delta that we’re making up in advertising. Again, to the point made earlier, I think getting the scale up, I think the mix between ad-free and ad-light is going to be different in a combined Discovery and HBO product. Obviously, HBO is still very much this very premium top end of the market positioning, and there’s a lot of people who just want that in an ad-free way. But again, the core conviction here is, we have great content. We have great content of different qualities or different recency. And we’ll make it available with an approach to cater to the different willingness to pay for certain segments. So, there’s going to be a premium price ad-free, discounted ad-light. And then, as we’ve been saying, we’re also looking at a FAST kind of model to make sure that we have something for everyone. We have a huge library, and there should always be a default monetization for someone who isn’t going to be willing to pay, but is going to be willing to pay us with his attention and the ability to advertise to him.
Ben Swinburne
So, last question, direct to consumer. So, you guys have a 150 million subscriber goal or target for 2025. I know the priority is the P&L, which I know you’re about to say.
Gunnar Wiedenfels
Correct.
Ben Swinburne
But that is a public number. I just wanted to hear from you how you think about the international opportunity in streaming an HBO Max in particular, because in the US, it’s a big business already. It’s a well-established brand, but the global situation’s a little bit more nuanced, I’d imagine, around the world.
Gunnar Wiedenfels
Yes, look, I mean, first of all, again, the guidance we’ve given is for a D2C breakeven in the US in 2024, and $1 billion in profit globally in 2025. And we have given the additional piece of information that we estimate that that’s going to be in the ballpark of 130 million subscribers to get that, to get there. You’re 100% right. From a subscription growth perspective, the US is going to play a lesser role than the international markets, and that’s a combination of relaunching the product in a number of markets where we are already active with two separate products, and launching in new markets, and some of the new markets are really going to be a little backend loaded. We got a lot of opportunity by optimizing the markets that we’re already in, and that’s going to be the path here, a combination of subscription growth and advertising.
Ben Swinburne
Thank you for correcting my 150 to 130. I appreciate that. Let me ask you about the studio business. So, Warner Brothers is one of the – a short list of very highly scaled studios, both in film and TV. Between the pandemic and the shift to streaming, there’s been a lot of sort of evolution in those business models. But sitting here today, how do you guys maximize the value of Warner Brothers inside of Warner Discovery?
Gunnar Wiedenfels
I think the most important point is building a capability to make individual decisions flexibly. I think one of the big, big benefits of what happened during the pandemic is that there is more flexibility today, that there is no stiff framework of, this is exactly how every film has to flow through the ecosystem, that we can speak with the distributors and that we can give and take a little, offer a little more time, talk about shares, et cetera. And I think we – again, as I said before, like no one else has the opportunity to look at the financial data coming back from all of these windows to make a great decision. That’s something that we’re just starting, but as David has been very clear before, we’re committed to a theatrical window. We want to do more films. Arguably, on the Warner Brothers TV side, we’ve got a larger slate next year. And we also want to take a better position regarding the leadership and quality position in that space, and we’ve got a phenomenal team in place. I was super happy when I spoke with David and he told me about James Gunn and Peter Safran. That’s going to be a real invigorating addition to the leadership team for the D2C – sorry, for the DC franchise. So, I think we’ve got the ingredients in place and it’s going to take a little while, because these things don’t happen overnight, but I think we’re in a great position. The TV studio is on fire. Channing has close to 100 series working right now, and the market composition shifts a little bit and changes, but we see a ton of demand for what Channing and her team are working on. We’ve got the greatest storytellers signed up. And you already mentioned HBO and the Emmy’s performance. I feel very good about our position here, and we’re going to make sure that, again, the studio has its place as one of these synergistic and somewhat hedged parts of the component of the total portfolio.
Ben Swinburne
This is a business at Warner Brothers TV that’s typically made most of its money selling to third parties. And there was always this conversation around Time Warner and Warner Media about Warner Brothers TV selling to HBO. Obviously, HBO is pretty good at making content themselves.
Yes.
Ben Swinburne
Is the ambition or the hope that the best content coming out of Warner Brothers ends up on HBO or HBO Max globally? Or is that maybe too simplistic of a way to think about it?
Gunnar Wiedenfels
No, I don’t think it’s simplistic. I mean, in an ideal world yes, we would love for Casey and the team to get their hands on the greatest hits that anyone comes up with. The reality is, it’s a little bit of a random element in there. And again, we’re super happy about the success of Ted Lasso and Apple. It’s great to have a buyer who is super happy and goes from season to season. It speaks to the creative capability of the Warner Brothers TV team. And Casey has been able to find very, very compelling content both from within and from the outside.
Ben Swinburne
Yes. If you look back at the historical business at Warner Brothers TV. it was very broadcast-network driven. I’ve got to think now, the streamers must really drive most of the – or the majority of that sort of first window of production. Any concerns that you guys have about Apple, Amazon, Netflix becoming so vertically integrated that they all of a sudden become – it becomes more of a buyer’s market than a seller’s market, or is it just too hard to corner the market on content?
Gunnar Wiedenfels
So, look, I think you’re right about the mix shift. There’s no question about it. And again, I think what you’re describing is a question that’s been asked over and over again over decades. Well, what if someone comes in and just shares tons of money and takes away all the content.
Ben Swinburne
All the good ideas.
Gunnar Wiedenfels
And the reality is, it does take a lot more than money. Money doesn’t score goals. And again, the market position that we have with Warner Brothers TV is a very, very strong one with great talent relationships. David, just on our earnings call, went through a long list of just the most important names that we had just very recently renewed on the creative side, and that’s something that’s very difficult to replicate.
Ben Swinburne
Sure. Yes. Okay. And then on theatrical, what is the right sort of size of slate for you guys? I mean, that’s moved around a lot over the years. It sounds – David sounds quite excited about getting back into a substantial level of scale in the theatrical business. What are you guys thinking about in terms of theatrical?
Gunnar Wiedenfels
It’s a little early to come up with a specific number. What I can say is, we want to do more. There’s no question about that. And again, to some extent, this is going to be driven by what’s available in terms of creative output. But to David’s point, we believe there’s opportunity in the theatrical window. Again, sort of at the risk of repeating ourselves here, this idea of direct to streaming for sort of normal size or large budget films, not a great approach. But I think there’s a lot of room in the theatrical space. There’s demand for more volume at the right quality, and we want to take part in that. And again, if anything, the releases, since closing our transaction with Elvis, Don’t Worry Darling, Black Adam, if anything, they give me more confidence in the value in this new sort of post-COVID ecosystem with flexibility. And again, just we just launched, Don’t Worry Darling, on the HBO Max platform, and we’re seeing great pickup, and there’s undoubtedly an impact of the promotional effect of a theatrical opening through the downstream part of the value chain, not surprisingly.
Ben Swinburne
Yep. Great. And lastly, I just wanted to come back to your comment about DC, the DC universe. David was talking a couple of days ago about just looking at the trajectory Marvel’s been on over the past decade and sort of what you can do with DC Comics, Batman, Superman. There’s been a little bit of news on the Superman front, bringing back some talent from the last – the last film was what, 10, 13 years ago, something like that?
Gunnar Wiedenfels
Yes.
Ben Swinburne
When will we all get a sense of what the plans are around sort of this, I don’t know if it’s a DC relaunch, but however you would describe it?
Gunnar Wiedenfels
Yes, I think we’ve got to give Peter and James a little bit of time. And this goes back to what I said earlier. The lead times for some of those decisions are obviously – or the impact of some of those decisions are obviously a little bit longer. But hopefully, they’re going to put their brand on some of the films that are in the pipeline for next year. And I want to give them the time that they need to formulate a broader, more detailed strategy. They certainly have a great vision, and it’s exciting to just hear them talk about the DC brand and individual characters and the connection between their own lives and DC. So, that’s certainly energizing, but stay tuned, I guess. They just started and we’ve got to give them a couple of months to hammer out a strategy.
Ben Swinburne
Right. Okay. Well, let’s shift to the basic networks business. We’ve got about eight minutes left, and now we should talk about the business that generates most of the free cashflow for the company.
Gunnar Wiedenfels
Right.
Ben Swinburne
So, there’s no mystery around the situation around linear networks in the United States. Obviously, a lot of macro and kind of secular pressures, but as a management team, how do you maximize the potential, say, on a three-to-five-year view for that business? In particular, what is the strategy on sort of TNT and TBS, which are massive businesses today? And David obviously is getting his hands an opportunity to sort of rethink those.
Gunnar Wiedenfels
Yes, look, I mean, forget about the current sort of macro backdrop for a second, but there’s no doubt, the linear networks are delivering the vast majority of free cashflow. And I have no doubt that they will continue doing that for a very, very long time. It’s clearly a business with secular challenges on the topline and some of the underlying drivers. But what gives me a lot of confidence is that the team that we have in place has done this before, has outperformed in a major way in a difficult secular environment. If you just go back and look at the data between 2018 and 2021, following the closing of the Scripps and Discovery combination, you’ll see that around the globe in most of the key markets we have, again and again and again, quarter by quarter, all perform in terms of share gains in the viewership space, and then the monetization of those share gains in the advertising space, and similarly, on the affiliate and distribution side. And I think that was not a coincidence, but it’s just so much easier and more effective to manage a combined portfolio program, a combined portfolio, sell a combined portfolio. And it’s coupled with the fact that specifically on the Discovery side, we’re also coming out of a world in which we have under-monetized some of our assets. We’ve been able to raise prices in a major way again and again and again, because we’re still at this point, despite having made significant steps, our premier advertising product got a lot more volume this year and the year before. And we’ve been able to raise prices, but we’re still relatively under-monetized from the perspective of what we’re bringing to the table.
If you think about it this way, in the US, we’re delivering a third of cable viewership, and many nights a lot more than that across all of the key genres, news, sports, scripted, unscripted, with very, very strong producer relationships in all of these genres. Internationally, it’s a little more diversified, depending on the market that you’re looking at, but with strong positions in pay and in free to air, in addition to our D2C footprint. So, I feel very, very good about our ability to outperform in this market, and I have no doubt that we’ll enjoy these cashflows very, very long time to come. And it’s also reflected in the synergy work that we’re just doing. There’s a lot of opportunities, a lot of – we have over 1,000 initiatives, and a lot of them are tied to optimizing the linear footprint. We’ve got a great team.
Ben Swinburne
You mentioned sort of leveraging scale in audience to drive advertising. You also commented – bringing things back to more the short term, on your earnings call about, the current scatter market’s pretty tough, and David made it sound like it was really tough a couple of days ago. I just wanted to ask you, since he commented on it a few days ago, if you could update us in sort of the state of the TV ad market.
Gunnar Wiedenfels
Yes, look, I mean, David was referring to the visibility. Week to week visibility right now in the US scatter market is really weak. I want to be clear, our view on the market hasn’t changed since we reported earnings. If you go – take a step back here, we guided for the third quarter high single digits to low double digits declines, and we came in on the bottom end of that. So, there was a little bit of an intra-quarter deterioration. And we’ve seen that same level of a market quality into the fourth quarter. Now, there’s a number of things that are coming together, starting with the US for a second here. Sports, predominantly the NFL, certainly in a weaker market has sort of probably attracted a disproportionate share in the third quarter. Political advertising is something that as well sort of benefits certain players with local add out that’s more than others. So, there’s a number of overlays there, but bottom line is, the market is a little – is soft right now.
And internationally, it’s a little different, better on balance, but with a wider range. We have markets like the UK that are very difficult right now, but markets like Poland, Italy, where we’re actually doing quite well. And again, I just – I don’t want to take a position here. I do think it’s cyclical, but one of the reasons why we gave a little more cautious outlook for 2023 is that I don’t want to be sitting here telling you $12 billion is in the bank, regardless of what the environment is. But I do feel that we’ve all seen this time and time again. We’re doing what we can. We’re taking a closer look at our cost structure. We’re laser focused on delivering our synergies. I talked about the $2 billion sequential delivery for next year. And hopefully, we’ll see the same outcome as 29, 2010, or at other tougher – softer markets before where we’re setting the company up with a sustainable cost footprint and got a lot of operational gearing once the market comes back. So, it is what it is. I don’t lose too much sleep over it.
Ben Swinburne
Okay. So, punchline is, things are relatively similar to what they were two or three weeks ago when you guys reported from an advertising point of view.
Gunnar Wiedenfels
Yes.
Ben Swinburne
Okay. And then the last question I had on the networks front is about sports. The NBA is the one people are quite focused on. Imagine it’s probably still a little early in terms of starting those negotiations, again, a couple of years left. David commented again that a new deal with the NBA obviously would only happen if it makes sense for Warner Discovery, but also that the deal will be different, that there’ll be maybe more digital extensions. Just talk a little bit high level about what Warner Discovery brings to a partner like the NBA that may allow a partnership to continue in a cord-cutting streaming world.
Gunnar Wiedenfels
Yep. Well, let’s maybe start a little more broadly here. Sports is a super important genre for Warner Brothers Discovery, and we have strong positions here in the US and Latin America and Europe. So, it’s here to stay. I think we’re also – we’re happy with the performance, specifically on the NBA. It’s a great right, but what David was referring to is I think two things. One is, we’ll always make – whether it’s sports or any other content investments, we’ll always make decisions on the basis of the best available information and with the best interest of our shareholders in mind. That’s how we’re going to be approaching deals. We’re not going to go after trophy assets or pay ridiculous prices just because we want to have something. So, I think that’s what he said. And specifically, here for the NBA, I think we’re really bringing something to the table. We have Bleacher Report House of Highlights, Inside the NBA. We’re doing very well on TNT relative to ESPN on viewership. We’ve got a global footprint. We’ve got a digital partnership with the NBA. We can potentially do more leveraging close to, and hopefully soon more than 100 million subscribers in the D2C space. So, there should be room for some creativity. And I guess the one thing that’s clear is, paying price increases for sort of a pure play linear deal at this stage in the ecosystem, I don’t think would be in the best interest of our shareholders.
Ben Swinburne
Sure. Okay. We’ve got time for maybe one last one. I wanted to step back again, sort of bigger picture and ask you about sort of the strategic outlook for the industry and Warner Discovery. I think every two or three years, you and I are here talking about another merger. You’re getting quite good at this. What’s your long-term view on sort of industry consolidation and sort of the opportunities that that does or does not present for a company like Warner?
Gunnar Wiedenfels
Look, I think there’s no doubt that sort of with this trend towards direct to consumer, there’s been a little bit of fragmentation, which from a consumer perspective, is just a little annoying. I think secondly, with the changes that we’ve maybe seen over the past 12 months, I would assume that in some boardrooms, the discussions around sinking another billion into a standalone D2C platform, might go differently than they have 12 months ago. So, I think there’s a number of great arguments for consolidation. Again, I continue to think that regulatory angle is going to play a role. And what matters to me is two things for Warner Brothers Discovery. Number one, we have what we need. The whole deal started with John Stankey and David Zaslav on the phone debating direct to consumer and the future of media and agreeing that together this will be one hell of a business. And I think that hasn’t changed, and we have what it takes across all key genres across the entire global footprint. We don’t need anyone else. Number two is, we’re head down delivering on a $3.5 billion, hopefully more synergy program. Everybody’s working overtime right now. It’s a great energy. The team is coming together. People are seeing that we’re making decisions for the purpose of one company, that we’re seeing some of the improvements flow through very much on the cloud side right now. I mean, as I guided for Q4, you’re going to see a very significant SG&A reduction of around probably more than 20%, and we’re going to see more come through next year. People are seeing that we’re creating something very different, and there’s a lot of excitement around it. And we’re looking forward to seeing the inflection on the D2C revenue growth and topline overall as well.
Ben Swinburne
Great. All right. We’re all out of time, Gunnar. Thank you so much. Thanks, everybody.
Question-And-Answer Session
End of Q&A
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