Warner Bros Discovery Inc

NASDAQ:WBD

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery, Inc Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Also, please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

[Andrew Slabin, executive]

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

You should have received our earnings release, but if not, feel free to access it on our website at www.corporate.discovery.com.

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

Before we start, I'd like to remind you that today's conference call will include forward-looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company's future business plans, prospects and financial performance as well as statements concerning the expected timing, completion and effects of the previously announced transaction between the company and AT&T relating to the Warner Media business. These statements are made based on management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them.

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

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

[David Zaslav, executive]

Good morning, everyone, and thank you for joining us for our second quarter earnings call.

Discovery continues to deliver strong operating and financial performance, driven by healthy momentum across all our key segments, beginning with our core linear business, which continues to accelerate sequentially, underscoring the durability of our content categories and the overall strength of our brands, while simultaneously scaling our global streaming offerings, most importantly, Discovery Plus, which continues to have strong traction, underpinning total next-generation revenue growth of 130% year-over-year and 17 million total global paying direct-to-consumer subscribers at the end of the second quarter, and 18 million as of today, with momentum around the globe, most notably behind the strength of the Olympics, which we've launched on Discovery Plus in Europe in a number of markets. Or the Eurosport Player which Discovery Plus has yet to launch though we've had some fantastic traction thus far.

We are excited about prospects for the second half of the year as well as for the Beijing Olympics. More on all of that in a moment. The combination of continued strong execution across our core business while scaling our streaming platforms drove healthy top line growth and strong OIBDA and free cash flow conversion supported by vigilance on costs. Gunnar and his team continue to do a terrific job leading transformation across the organization with an eye towards continued efficiency, particularly as we absorb investment spend to support the growth and rollout of Discovery Plus. And we delivered a meaningful sequential improvement in our investment losses as we lean into modernization and begin to see the benefits of scale from an expense base.

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

Jon Steinlauf and his team delivered top-of-tier performance and a record for our company, a testament to the programming and brands that viewers love and that our advertising partners value, as well as our differentiated suite of products and platforms available to reach consumers in an otherwise increasingly fragmented marketplace. We achieved rates of change inclusive of the stepped-up performance of Discovery Premiere that were well ahead of the peer group. Premiere has proved to be a great success, a unique vehicle that packages first run episodes from our most popular series and networks, in which sales more than doubled. Over 200 clients are now buying Premiere. They enjoy ratings and reach that is equivalent or greater than broadcast prime but at a significant CPM discount. You've heard me tout this as a true win-win, and we keep driving this forward and clients love it. Moreover, demand for our bouquet of digital properties across Discovery Plus, our GO app, VOD and sites in social was robust. Advertisers continue to look for incremental reach beyond linear. And with roughly half of the audience base for Discovery Plus being noncabled households, the platform is hugely attractive to buyers. We look forward to additional product features and offerings to roll out throughout the year to drive further monetization. But what we are currently seeing is noteworthy. Advertisers are buying targeting capabilities of our platform, with innovative and intelligent solutions and healthy premiums to traditional linear. Internationally, advertising has also come back in a big way, driven by a number of key markets, such as the U.K., Italy, Germany, Poland, as well as a number of Lat Am and APAC markets that resulted in all regions around the globe turning in an acceleration and traction throughout the quarter.

Turning to Discovery Plus. We are really pleased with the cadence and monetization of the service, supported by continued subscriber traction and healthy ARPU, notwithstanding the seasonally slower summer period, only exacerbated by the post-COVID reopening. That said, we had healthy sequential improvement in paid subs quarter-over-quarter, with most of Discovery Plus International runway still ahead.

Here in the U.S., we continue to add to our distribution and platform footprint. Following last quarter's launch with Comcast, in the coming months, Discovery Plus will also be available to Cox subscribers across their Contour TV and Contour stream player platforms. Discovery Plus will also shortly be available on VIZIO SmartCast, advancing our rollout to all major consumer platforms.

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

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

JB and his team have been deliberate and methodical in managing our international rollout to ensure the best consumer experience. This includes ensuring we have strong integrations with local partners and completing a major replatforming to get both our front-end and back-end technologies on one common platform. It is a complicated road map of engineering and commercial logistics, not to mention COVID challenges around the globe in some of our tech hubs, at the same time that we have been planning, producing and delivering the Olympic Games from Tokyo.

We continue to learn a lot as we go, in terms of what's working and what's not, with respect to marketing, branding, tech product and features, as well as distribution partners and platforms. We are very pleased with the metrics we look at to evaluate our position within the marketplace, consumer acceptance, role to pay, viewing time for active subscriber, churn, monetization and so on.

We provided an early glimpse across these metrics last quarter, and I'm pleased that we continue to track well against our internal plans. And the momentum we are building as we look ahead to our exciting plans post merger with WarnerMedia and HBO.

Taken together, we could not be more excited about the possibilities ahead to serve consumers with the deepest and most compelling content offering in the world. Consumers want choice and simplicity. We believe that the combined company will be able to offer more of both. In a video market that could see more consumer selectivity as the market reach soars, we believe the combined company will be well positioned to compete in the global streaming marketplace. The regulatory process continues to move forward as planned, giving us confidence in our previously stated time frame of mid-next year to close.

And lastly, the Olympic Games in Tokyo, which, as I noted earlier, has been a very pleasant surprise during what can only be described as challenging circumstances.

At this point, about halfway through, we've already doubled our total sub gains from the last Olympic Games in PyeongChang, with nearly 0.75 billion minutes of Olympic content streamed, up over 18x versus the last games.

Like with the Winter Games, we've enjoyed some truly remarkable viewing shares in key markets, like the Nordics, in which our share of television viewing for certain sports has been upwards of 60% to 80%, and with outstanding traction with streaming across all markets, notably in the U.K. and Italy, which are newly launched markets for Discovery Plus. We are very excited about the upcoming Olympic Games in Beijing in early 2022, and then, of course, Paris in 2024, right in our backyard. These are truly hallmark, high-value branding events, and are super funnels that drive awareness, viewing and subscribers to our platforms.

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

[Gunnar Wiedenfels, executive]

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

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

While comparisons against last year's advertising performance were very favorable, we are especially encouraged by the acceleration and sequential improvements we've enjoyed from every region around the globe and return to near pre-pandemic levels. The U.S., Latin America, EMEA and Asia Pacific all turned in impressive results. And of course, Discovery Plus is providing a nice tailwind to our performance.

Turning to second quarter results, beginning with the U.S. segment.

Advertising revenues increased 12% year-over-year as we continued to take advantage of a very robust advertising market for both linear and digital inventory. We saw strong demand in all key categories, including CPG, pharma, cosmetics, auto, retail and home improvement, far more than offsetting the softer viewership across the industry as compared to the peak COVID Q2 of last year. Scatter CPMs were up 50% plus versus last year's upfront and up more than 30% year-over-year.

Additionally, Next Generation advertising demand was very healthy across our suite of products, with revenues up 70% year-over-year. Specifically for Discovery Plus, more than 800 advertisers have now bought inventory on the platform, more than 4x the number of advertisers that we had targeted by the end of the second quarter. Interestingly, more than 90% of all clients who have bought inventory on Discovery Plus also bought inventory at our GO and TV Everywhere offerings, underscoring the power of integrated audience solutions across our suite of digital products.

Furthermore, we continued to roll out new ad products on Discovery Plus. For example, we recently launched Greenlights, an ad product that allows clients to own the first ad served to every user on Discovery Plus on a specific day.

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

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

Distribution revenues grew 12% year-over-year on a reported basis or 18% like-for-like, primarily driven by continued traction and monetization of the Discovery Plus subscriber base, helped by linear affiliate pricing, offsetting the year-over-year decline in pay-TV subscribers. Subscribers to our fully distributed networks were down 3% during the quarter, while total portfolio of subscribers were down 7%. However, recall that we sold Great American Country during the quarter. When adjusted for the sale, total portfolio of subscribers would have been down 3% year-over-year during the quarter, as we continued to benefit from specific distribution gains across certain networks from recent renewals. We will begin lapping those renewals in the coming months. And you should expect to see our linear subscriber trends more in line with the industry going forward, as we have discussed prior. Worth noting also is that the sale of GAC did result in a modest headwinds to both reported advertising and distribution revenue this quarter as we did not recognize any contribution for [indiscernible] quarter.

Turning to the International segment, which I will, has always, discuss on an ex FX basis. Advertising revenues increased 70% year-over-year as we saw significant growth off the second quarter last year. We saw a strong revenue growth across all regions, with the pace accelerating throughout the quarter, with a number of key markets nicely above 2019, as David mentioned. Distribution revenues increased 6% versus the prior year, supported primarily by direct-to-consumer subscriber growth. Though as noted, there were no material new market launches during the quarter. This was partially offset by lower linear affiliate rates in certain European markets.

Total company operating expenses increased 33% during the quarter. Cost of revenues increased 25% year-over-year, as sports returned to a more normalized schedule this year versus virtually no sports last year due to COVID-related shutdowns as well as the continuing investment in B2C content.

SG&A increased 43% versus the prior year as we invested in marketing and personnel to support our Discovery Plus rollout. We continue to focus on driving efficiency in our core linear networks, and we remain on track to reduce core linear OpEx in the low to mid-single-digit percentage range for the year.

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

Q2 next generation revenue growth of 130% is annualizing at a $1.6 billion run rate. And we expect additional sequential quarterly revenue growth for the year and beyond. As we launch in new markets during the second half of the year, we expect that we will continue to incur investment losses, though more or less in the same ballpark as this past quarter, mainly driven by content and marketing costs. We continue to expect that investment losses will peak this year.

Overall, we remain very pleased with all of the core KPIs we closely monitor, and we continue to track well against our internal plans.

Global direct-to-consumer ARPU remains consistent with Q1, as the impact of certain international distribution partnerships and associated early promotional activity is offset by our strong and growing U.S. ARPU, which is nicely supported by the AdLite Discovery Plus product.

Roll-to-Pay still remains high at an average of close to 80% across the global DTC portfolio, as does average engagement per viewing subscriber, which is more or less in line with what we saw last quarter. As well, we remain pleased with overall churn, which naturally is at the lower end for the most mature subscriber cohorts and skews higher for the most recent one.

As I noted, the vast majority of our international Discovery Plus growth thus far has come from existing markets. And we plan to launch in a number of key markets and territories during the second half of this year, including Brazil, Canada and the Philippines, alongside additional Vodafone markets in Italy, the Netherlands and Spain around the end of the year.

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

This has been a heavy lift, particularly given team constraints related to COVID in our tech hubs, primarily in India. Other puts and takes to consider will be our ability to maintain and keep subscribers that come in during the Olympic Games, though the initial Roll-to-Pay numbers look very encouraging. Net-net, we remain very excited about our local go-to-market strategies across these important countries through the end of the year.

Turning to housekeeping items.

Net income for the quarter was $672 million or $1.01 per share on a diluted basis.

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

Second, our effective tax rate during the quarter was negligible, as we recognized certain noncash tax benefits totaling $162 million or $0.24 per share. Given these tax benefits, we now expect the full year effective book tax rate to be in the mid-teens range. For cash taxes, we are now anticipating a slightly higher rate, in the high 20% range for the year, excluding PPA amortization, as we are positioning our tax footprint for optimal outcomes across a number of legislative scenarios for '22 and beyond. Third, and finally, the PPA impact was $0.30 per share.

Adjusted for the above, EPS would have been $0.89 per diluted share.

Now turning to free cash flow and our leverage.

We generated $757 million of free cash flow in the quarter, representing a near 70% conversion rate of AOIBDA, notwithstanding the continued investments we are making as well as the return to normalized content production levels. Year-to-date, our AOIBDA to free cash flow conversion rate is nearly 50%, and we remain confident that we will convert at least 50% of our AOIBDA for free cash flow this year, even with the anticipated new market launches and slightly higher cash taxes mentioned earlier.

At the end of the quarter, our net leverage was 3.25x, which is within our current target range. We expect our net leverage could be temporarily at the high end of our target range due to the Olympics in the current quarter. As a reminder, we do expect to recognize the $175 million to $200 million of AOIBDA losses during the third quarter as a result of the Olympics, though we continue to expect that we will break even or generate slightly positive AOIBDA and free cash flow over the life of the deal.

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

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

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

We remain focused on delivering solid operating performance while we build the framework to support long-term sustainable growth and shareholder value. And we are eager and excited once we gain all the requisite approvals to roll up our sleeves to capture the tremendous opportunities offered by our proposed merger with WarnerMedia. And of course, we look forward to speaking with you at the appropriate time on our thoughts and plans around integration, strategic direction, synergy, et cetera.

With that, I'd like to turn it back to the operator to take your questions.

[Operator]

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

[Kutgun Maral, analyst]

Just on direct-to-consumer. Can you help us better understand the international rollout trajectory? I know you called out Brazil, Canada, Philippines and a few European markets with Vodafone for the back half of this year. Some of these are particularly big broadband and mobile markets. I'd be curious which market launches or distribution partnerships you see as the biggest opportunities. And maybe more broadly, how are you thinking about the subscriber momentum into the back half of this year, especially, I think there's some concern that we might see some churn pickup with some of these distribution partnerships that had 6-month promos? And then just lastly, I know it's early, but any thoughts on the international rollouts looking to 2022?

[David Zaslav, executive]

JB?

[Jean-Briac Perrette, executive]

Yes. So we have -- as you noted, we have the markets we've announced that we'll be rolling out. I think we feel very good about them. When we announce, when we get closer to the actual release date, we will also be announcing in many of the markets as we've done to date, both in the U.S. as well as internationally, partners that we'll be launching with, so you should expect sort of fairly consistent to what our historical precedent has been, some strong partnerships in a few of those markets that we roll out. And so we feel good about that.

I think as Gunnar touched on in his comments, we are -- those are sort of leaning towards more sort of September and into the fourth quarter, where we had hoped, obviously, to be starting more ahead of that into the third quarter. But due to obviously wanting to make sure we got the Olympic Games off the ground successfully and getting this replatforming completed, some of that will hit a little bit later in the second half of the year than we initially thought.

And in that time period, I think we do see internationally some -- obviously, we're expecting significantly more growth coming out of those new market launches as we get towards the back half of the year.

As it relates to '22, I think it's a little bit early to talk about that. The only comment, which David and Gunnar may amplify, is, obviously, as we get later into 2022 and we get further visibility on the timing of the WarnerMedia deal, we obviously will look at making sure we stay smart in the context of when that timing and when that deal might close as to how we maximize the rollout schedule of those services into 2022.

So that's, I think, as much as I know. Gunnar or David, if you want to add anything else, that's as much.

[David Zaslav, executive]

Just to add. The execution on the Olympics was really almost flawless. And all of our -- the entire Olympics was offered throughout Europe on our product. People are spending a huge amount of time, as you've seen it, 18x what it was before for PyeongChang. It was very simple. The navigation was simple. We spent a lot of time making sure we get the product right. That's going to help us. But we're also, as I've said, we're learning. One of the things that we're -- that we've learned along the way is navigation and simplicity is very important for people to be able to find the products that they want, particularly with a complicated product like the Olympics, and it's really working.

We'll have Beijing coming up in a few months. It's very unusual that we get a back-to-back like that. So we think that we can do better in terms of keeping subs and growing subs because we don't have a 2-year lag between the 2 games, which is advantageous.

The other thing that we're learning as we look to roll out outside the U.S. is that AdLite is a really compelling product. We're generating about $6 in advertising per subscriber here in the U.S. with 3 minutes of advertising. And the friction for users is nonexistent. When they're used to seeing 14, 18 minutes to [ see 3 ], and so there may be a real strategic opportunity for us here. We're doing extremely well in packaging that product together with linear, together with AVOD here in the U.S. And so whereas a year ago, we thought everything would just be subscription, we're looking at AVOD as a meaningful opportunity to go into markets at a lower price, get more scale and be able to pick up actually more money. We're making more money on our AdLite product by an awful lot here in the U.S. And so doing that requires more engineering, more coding, but we want to get it right.

And as JB said, as we get closer to the Warner Bros. Discovery to our transaction, we'll continue to look -- right now, we're both accelerating. And Warner is doing a terrific job, John Stankey and Ann and Jason. If you take a look at -- and Casey. You take a look at the momentum that they have, they're driving hard. We're driving hard. And then we'll true up together. At some point, we really do have our strategy. We can't share it with you right now, but we will look carefully as to how we want to true these up together. And so that might affect as we get closer to the approval what exactly we do, knowing that when we're coming together as a new company.

[Gunnar Wiedenfels, executive]

And Kutgun, maybe one thing that I'd like to add is your question on churn. So that continues to track very nicely ahead of our plans. And most importantly, Roll-to-Pay is also very stable, as I said, close to 80% across our various products. And to your point about some of those distribution partnerships starting to come off of the initial period. That's another area where we've actually been positively surprised Roll-to-Pay is a little lower there, as you would expect, but not as meaningfully lower as we had modeled. It's actually been a positive surprise.

[Operator]

And your next question comes from Steven Cahall with Wells Fargo.

[Steven Cahall, analyst]

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

And then, Gunnar, I think you reiterated being at peak investment this year in terms of the AOIBDA drag at NextGen. As you think about the merger with WarnerMedia and the DTC services, I know spending on content remains pretty sacred. But when you think about either stack or tech, is there any reason that you might decelerate that as you're going to be combining all these systems at some future point? And could that create any upside to maybe the 5x leverage target when you close?

[David Zaslav, executive]

Thanks, Steven. Well, let me first speak to the merger timing. I was in D.C. last week. I met with the -- across the Board, spent a full day. There's broad support for this transaction. We haven't heard any pushback. We haven't seen any public pushback. This becomes a very strong company for consumers, a more compelling streaming business. And so right now, it feels to us on every level like we've seen green lights. We're not seeing any yellow lights or red lights. Having said that, we're not in control of the timing. Disney was able to get their deal done in 6 months. Everything so far is extremely positive. But some of the timing with respect to the IRS and the DOJ, we can't -- they're working very effectively with us, the AT&T team and John. John has a terrific team that's working with our team. But ultimately, it could be significantly sooner. It could be a little later. We're just not in charge of the timing. But we feel very good about it at this point. There's nothing that we see. And I mean -- we're still hoping that we could really get lucky and it will happen a lot sooner. And that's what we're all pushing for.

On consolidation, look, I take a look at this business: Warner Bros. Discovery. And there's just -- the toughest thing to do is to put together a great library or a great menu of content or IT. That is the most difficult thing to do. Yes, we need a strategy for what the price is? Is it ad? Is it AdLite? Exactly how do you go to market in each country? But the toughest thing to do is come up with a menu and have the strength of content to not only get people to come there but get them to stay.

And one of the things that's happened since our deal is you look at the Amazon deal where you look at the announcement of the Reese Witherspoon deal, almost $1 billion for that basket of content, 8 -- almost $9 billion for the basket of content that MGM has, great company. Reese developed a great company. But we own a significant amount of the MGM library, this new company when it comes together: Harry Potter, King Kong, Godzilla, Batman, Game of Thrones. You look at what Casey is doing right now with Hats, white Lotus, Mare of Easttown, Sex and the City coming back, Friends, Friends Reunion, Space Jam having a big week, a big week against the Marvel property which Toby put together. Ann and Jason, they're sitting on top of just an extraordinary library of IP. Hanna-Barbera. All these things you cannot create. And so we look at all of that, and we say we can't wait to close. We think we have the broadest, most compelling IP together with what Discovery has.

And as Gunnar said, we're seeing over 3 hours of engagement. Our churn is very low. We have great nourishment. And the combination of Harry Potter, King Kong, Batman, together with all of our great nourishing content globally and all the local content we have around the world as well as sports and news, we think makes us really compelling.

Having said that, you look at -- here's 2 transactions that have happened. People need more IP. We -- I believe that what we have is not only do we have, I think, the strongest set of IP, but we have the broadest global -- we have the most global content in language of anybody. So I think we start off in a very, very strong position. And I think we're fine if nothing happens.

But I believe that over the next couple of years, there's going to be more and more people are going to look, and they're going to raise their hand, and they'll do more consolidation. There'll be more IP library sold, because you need a lot of content to be successful. And I think people are going to take a look at what we have, what John Stankey put together, together with what we have. And it's really going to be formidable. Disney and Netflix have gotten across the lake. And we think that this will be the third global streaming service, successful, sustainable. That's our mission. And a lot of the other IP that are subscale will probably be raising their hands or -- there will be a lot of consolidation. And some of that may be opportunities for us. But right now, I really like where we are.

[Gunnar Wiedenfels, executive]

Okay. Steven, let me take the other question on peak investments. Again, as I said, we're reiterating that expectation that 2021 is the peak year. And again, I think it's just -- it's coming together very nicely, right? You're seeing the revenue contributions kicking in. We're tracking at an annual run rate of $1.6 billion NextGen revenues now. Significant step down in our start-up losses from our investment initiatives overall. So this is in line with what we've been talking about previously. And I don't want to go through all the details again why, but we will be able to get some nice profitability out of streaming at comparably lower subscriber numbers earlier.

To the second part of your question. HBO Max had guided to 2022 being peak investment year. That's how we reflected in our deal model as well. And there's no update right now as to sort of the combined operation, as you would imagine, because we're still managing these 2 companies completely separately. But if you look at our free cash flow conversion in the second quarter, you can clearly see that we got our priorities straight and the entire management team is working hard to really get us position here.

And again, from that perspective, while I don't want to give an update on that 5x leverage expectation right now, again, I view that as a nonissue. We have a ton of confidence that we'll very, very quickly get to where we need to be.

[Operator]

And your next question comes from Doug Mitchelson with Credit Suisse.

[Douglas Mitchelson, analyst]

A couple of questions, if you don't mind, on SG&A. It was down quarter-over-quarter in the United States. And you mentioned coming off of a launch marketing or more efficient marketing. Is this 2Q level sort of a good SG&A level that we should expect to continue?

JB and David as well, JB, what are you seeing from Discovery Plus so far in international markets? How does that inform your launch strategy for upcoming markets? And in particular, if you think about pricing for this service, are you better off pricing at a premium for super fans or pricing low and trying to drive the service as broadly as possible?

[David Zaslav, executive]

Let me take the SG&A question quickly. So the way I would look at this, Doug, is -- and I said as much earlier in the prepared remarks. I view this sort of $250 million roughly, give or take, level of investment losses as a probably best estimate as of today for the third and fourth quarter. That implies, since we're assuming revenue growth, that we are planning to spend more. And again, we want to continue making those investments. It's a growing product with, again, a very, very strong long-term value proposition. So you should see a general trend of expenses growing, but very much in line, and then over time, slower than the revenue side.

[Jean-Briac Perrette, executive]

And just the -- in terms of our all-in mission, our all-in mission -- we're not going to get into how we're going to price in each market at this point because it wouldn't be appropriate. We're not going to talk about exactly how we're going to package at this point because we just can't do that right now. We have a compelling plan. We're looking at -- we're going country to country. We're actually trying some different things so that we can learn more. We're watching the great success that John and Ann are having as they accelerate. But we're focused on 200 million global subscribers. This is not about niche. This is about global subscribers.

And we -- for me, after we close this deal, it is going to be 2 absolute missions. Mission #1 is drive direct-to-consumer to 200 million subscribers in every language in the world and with a product that's easy to navigate and use. And we think we can do that when we close. We're both growing, so we're going to start with a good base to get there. But that's the left side. The right side is focused on having the best creative company in the world. And Warner Bros. has been the greatest creative company in the world, the place that the talent wants to come, the place where they feel nourished and supported. And that's the history of Warner Bros. And most of the great content that I've seen, that we've all seen, we don't even realize it. In the end, we see that Warner Bros. seal. And it stands for something. It stands for great storytelling. And we are one -- maybe the only company that has the ability to focus only on that one thing. We're not in the phone business when this deal closes. We're not in the retail business. We're not in the cloud business. We're not in the cable business. And so that's the focus.

And that singular focus, I think, will drive a great culture. This is where people that care about content, that love content, that saw the magic when they were kids and they looked up at that screen. That's why we all got into this business. And that's the only business that we're in. And I think that, that, together with the fact that Warner Bros. itself, we can open a movie everywhere in the world as well or better, maybe best of class.

And that's not going away. The motion picture business is not going away. It's why it's the top of the patina. It's why the greatest writers, producers and creative talent came. And when you look up at that big screen, that's where stars are made and that's where the magic happens. And so 200 million subscribers, a great team putting these companies together to drive toward that and a great creative culture with a -- at the very top a motion picture business that will be 100 years old in 2 years and has a heritage of all the great storytelling that we all grew up with. That's the company, and that's what we're going to drive for.

[Gunnar Wiedenfels, executive]

If you want me -- just one thing I can say on the current pricing, to your question of Discovery Plus. I will say that what we've seen so far is the very broad, very scaling distribution. This is -- the international growth is not driven by one market. We've seen very even and very significant million-plus market so far across some of our biggest territories. So we feel that it's not necessarily a question of going high priced small or low price broader. The reality is that we're able to hit the sweet spot right now with the pricing that we have in most of our markets, which is, on average, for the entertainment tier, in this $4 to $6 price range, and that that's scaling very nicely. Now again, hard to talk about the globe in one swoop, because, ultimately, markets where we have more premium sports, we will price higher. Markets where we don't and that have lower price sensitivities like LatAm or Asia, we'll price lower. But generally, we feel like we can actually hit a very attractive price point, much higher than our wholesale pricing today, and still be in a sweet spot that ultimately delivers scale at the same time.

[Operator]

Your next question comes from John Janedis with Wolfe Research.

[John Janedis, analyst]

David, maybe if we could start. Can you give us more color on Discovery Premiere? How much more inventory is available for you to sell into the market? Can you double or more again? And what is the CPM lift relative to the rest of the portfolio?

And then maybe shifting to Discovery Plus. Any more early trends you could talk about from a viewing perspective? Is the proportion of time spent there on specific networks or programs consistent with your linear networks? And for the content that's premiering on Discovery Plus, are you seeing a lift in subscriptions or impact on linear ratings?

[David Zaslav, executive]

Thanks, John. Well, first, the upfront was the best upfront that I've seen in my career. On average, it was up about 20%, and we were able to beat that significantly. So I think I believe we were best of market, but this was a market that was up 20%, and we picked up -- we did much better than that. And one of the reasons is because of the Discovery Premiere. And in some ways, it's a great story, but it's one that -- it starts off with the fact that we're not getting enough and we haven't been getting enough for -- in CPM for the great content that we have.

And broadcast is in the 60s, and where we have been in the 20s. And so we -- one, we made some more progress against the broadcasters. But Discovery Premiere is in the 40s. And so for advertisers to be able to get content that has the same or better reach with the same or better engagement in the 40s, for us, it's a dramatic increase. But for advertisers, it's a significant decrease because instead of buying a broadcaster for $64, they're buying us for $45 or $43 or $47. And so it's a real win-win. And we're able to service -- we have great demos, and we're able to go -- not only do we have the Premiere product, but now we have Discovery Plus, with the engagement of a much younger audience. And we could put together between linear and Discovery Plus and GO a really compelling package. And the result was our most successful upfront. And I think it's -- the fact that ratings are down in the aggregate is something that we're going to be living with for a long time. But look, I've told the story before. But in the 90s, we went up and -- when I was running the cable group, broadcast was going down and advertising rates were going up. And Walt said that can't continue. And it continued to the date. It's been going on for 20 years. I can't predict that that's what's going to happen. But there's not a lot of great inventory out there. The inventory is declining. And we have some of the best inventory out there. And then, one, it's generally underpriced. So when we get big increases, it still looks good. But 2, the overall bouquet of what we're offering now between the young demos on Discovery Plus and GO and the engagement in the audience that we have on all of our brands and what we can put together for our advertisers, there's real scarcity. You have the scatter market at plus 50 right now. And there are a lot of others that are under-delivering, and so they'll be out of sale.

So in general, when you see the fourth quarter, you're going to see a real opportunity. But I talk about visibility. It's because the numbers in terms of the upfront that's going to start in the fourth quarter -- and it's a good thing because maybe we'll be down 15%. But maybe the advertising -- it looks like the advertising is going to be up dramatically more than that. We can't predict whether that will continue. But it's -- right now, it's a trend with scarcity. And the way that our content and linear content can deliver an audience for an advertiser, the prices are going up, up. And so we hope that continues because it's an offset, and it allows us to still grow in linear, which is meaningful.

[Jean-Briac Perrette, executive]

And generally, I'd say to your question about engagement on Discovery Plus and content, it does, John, largely obviously follow a lot of our biggest networks, but the genres is certainly in the crime, paranormal, home, the Discovery content, a lot of the sort of traditional, our core genres in the linear space also are those that are driving our Discovery Plus activity, in the U.S. that is. Obviously, reality in the TLC sort of genre, also a big driver for us. As you spread out and go internationally, it becomes a little bit more diverse in the sense that, obviously, we have bigger broadcast content in markets like Poland, the Nordics, Italy. And so we have bigger entertainment formats also that are working extremely well. And then sports, which we've talked about, both in terms of the Olympics and outside of the Olympics. So it becomes a slightly more diversified story outside the U.S. But in the U.S., it is driven by a lot of the core genres and think about us for TV.

[Operator]

Your next question comes from Jessica Reif Ehrlich with Bank of America Merrill Lynch.

[Jessica Reif Cohen, analyst]

A couple of questions. There have been press reports regarding your interest in Channel 4 in the U.K. And I mean, it's great that you're still looking at transactions while you're about to close one of the biggest. But can you talk about M&A priorities or opportunities outside the U.S.? Can you give us an update on what's going on in Poland from a regulatory perspective? And then finally, in advertising, how much crossover is there on the various platforms for your advertisers? Or do -- are you attracting different advertisers to different platforms?

[David Zaslav, executive]

Well, let me start, and then, JB, I'll pass it to you. We can't comment on Channel 4. But I would just say we're focused on one thing and one thing only: closing this transaction and putting together the spectacular company that is -- that has global IT, leadership in terms of the content that we have, local content, sports news, the best bouquet of content, together with strong leadership at both companies and both having a really good platform that consumers are engaging with and liking. This is a -- this -- our focus is singular, close this deal and drive this company. As I've said, drive the subscription piece, create a culture, and drive a culture where creative talent wants to come and want to tell their stories. That's our focus.

I -- so we're not going to comment on any other specific transaction. But I do think that there's a lot of players that are subscale. And a lot of them are going to be figuring out over the next couple of years what they do. And the good news for us is we think our hand is very, very strong domestically and around the world. And we'll focus on getting this deal done and taking that hand to market.

[Jean-Briac Perrette, executive]

And Jessica, the only thing I'd add to that one is also, we take it as a -- we're proud of the fact that, unfortunately, every time that anything is potentially up for sale, our name gets mentioned because we have obviously had a successful track record of acquiring, integrating and then successfully managing all sorts of businesses. The reality is, oftentimes, as David said, particularly these days, our focus is in a different direction right now with the closing of the Warner deal. That's our primary focus.

So in terms of the ad sales climb, then I'll come to Poland at the end. On ad sales, we do see a vast majority of our clients overlapping between linear and digital. So it's a very strong correlation. And a number of clients were doing both. On Poland, look, we -- as we said, I think, publicly in the past, we remain very committed to the business. It's a great business. It continues to be a growth business and a very healthy business for us. The environment is obviously challenged. We're actively talking to all the different constituents and stakeholders to make our case. And we think it'd be very, very economically irrational for the government to try and pass any laws that ultimately would change our position and make the environment way less attractive for foreign investment, not just media, but any foreign investment. And so at the end of the day, we'll continue to work on that situation aggressively on all sides. The U.S. government, the EU have all been very supportive and fully behind us. And we'll keep you posted as that continues to go on.

[Operator]

And your next question comes from Robert Fishman with MoffattNathanson.

[Robert Fishman, analyst]

David, following up on your earlier IP comments and tying in what you're seeing with the Olympics. Can you share updated thoughts on how important international sports rights are for your company, especially as it relates to driving Discovery Plus subs when the next round of sports rights come due? And then for you or JB. Can you update us on how the pay TV ecosystem looks outside of the U.S. as it relates to cord cutting and whether you plan to be more aggressive shutting down linear cable networks as Discovery Plus ramps up?

[David Zaslav, executive]

So let me just start by -- with the cord cutting question. Outside the U.S., in the aggregate, with the exception of last quarter, the period during COVID, where we really grew, we're doing as well or better as we've ever done in history. This past quarter, we were strong as -- much stronger than we were in overall share than we were in '19 or any -- all those prior years. And unlike the U.S. where pricing is so high, pricing for entry cable is much lower around the world.

And so it -- there is some decline and there is some decline in viewership. But it's much more moderated than what it is in the U.S. JB can speak a little bit more to that, and then we'll jump in on the sports piece.

[Jean-Briac Perrette, executive]

Yes. I think, again, it's hard to paint it all with one brush. There are, as David said, generally, broadly, we do see some cord shaving, but the cord cutting has remained fairly stable internationally. So we don't see the same sort of dynamics as we've seen in some in the U.S. The cord shaving is really sort of elements of some of the higher tiered and higher-priced points, people churning down to lower tiers in certain markets. But those are, I'd say, more limited, and in the higher-priced markets like Northern Europe in some cases. And then there are markets like Brazil, for example, for macroeconomic reasons that certainly have seen subscriber decline over the last few years as the middle class has been squeezed. But at the same time, we know in the markets like that, that video consumption and video viewership is as hungry as ever. And that's where, particularly with the launch of Discovery Plus coming, we're at an even more attractive price point than what they would have paid even for a more reasonably priced pay TV package. We're excited to see those subs that might have left the pay TV bundle over the last few years have a chance to come back to us at a more attractively priced Discovery Plus option going forward.

In terms of shutting cable nets like I think Disney has announced, we still see a very healthy business on the pay TV side. The hybrid deals we talked to you about where we've done deals with existing partners, the continued carriage of some of our channels at healthy economics, plus launch Discovery Plus, and so do a kind of 2 for 1. Those have been very successful for us so far. And we continue to see a lot of opportunity to be able to drive both of those. So we don't see necessarily the shutdown scenarios. But over time, there may be a handful of markets where we say they may be worth experimenting. But for now, we see a healthy ecosystem and healthy partnerships with this hybrid model.

[David Zaslav, executive]

On the sports, we're learning. I mean we've been at it for now over 4 years. So we needed to find a better product. Then we were going direct to consumer in Europe with individual sports. And the good news is we're trying different things, and we're trying to figure out. Ultimately, the consumer is going to decide how they want it. And we're finding that we're having more success when we put the sports together with the entertainment together with the nonfiction. But it's early days. It's still only in the third inning. So in a lot of these markets now where we have football, where we have cycling and we're putting it all on D+, we're looking and we're trying to get a sense of what's the acceleration of subs? What happens to the churn? Right now, it looks quite favorable. We're also anxious to see which will -- where we're not getting an inside look at all in Warner, but they launched in Latin America, and they launched with a lot of very compelling sports like football in Latin America. How -- what is their experience? The Olympics has been a really good experience for us. We're doing very well with it. Share is up 30% from PyeongChang. We're finding that the engagement is much higher, as I've said. And so we don't know yet what the churn is going to be. I think it's going to be helped by the fact that we have Beijing coming. But ultimately, when these companies come together, it's all about the IP menu. We have news; what role will news play? We have sports. We're if not the leader, we're one of the leaders in the world in terms of the sports. Jeff Zucker and John Stankey and Jason got -- were able to lock up sports rights in the U.S. with some of the best leagues outside of football, which is compelling. So we look at all that IP and figure out, what do we do with it? How do we offer it? Is it all pay? Is some of it free? Is it all together in one package? Is it in 2 packages? But it's -- the sports, I think, is not that different from Harry Potter or King Kong or DC Comics or a lot of the HBO IP. But with the exception of the fact that we don't own most of the sports. So what we've done is we've tried to get long rights for those sports and be very careful about what we pay for it. But we will -- there is a difference in that, when you're building these -- the franchises that we have, whether it's Chip and Jo, whether it's the Oprah Winfrey product or whether it's a Warner Building, DC, you own that forever. And sports, you have to eventually come back and pay for. And so there will be a view over the next several years of how that -- how important sports is, how and what the return is on it. But we're very happy with the fact that we have fantastic sports globally that we'll be able to use when this company comes together in the package. And we're doing very well with sports in Europe right now.

JB, anything to add?

[Jean-Briac Perrette, executive]

I think that's exactly right, David.

[Gunnar Wiedenfels, executive]

Robert, I want to just repeat one thing that David said in passing just to make sure that everybody has heard this. Our second quarter this year was the second strongest in our history internationally when it comes to actual audience delivery in terms of eyeballs or viewership, second only to last year's second quarter, which was obviously impacted by the massive COVID spike. So it is a fundamentally different story internationally versus domestically.

[David Zaslav, executive]

Yes. And we're getting better at doing local content in these markets that people love and they want to watch. We're gaining share. So even though some people may be bailing on linear, the linear advertising market is extremely strong. Our share is growing, and we're doing what's very hard. We're programming in these countries in every language. And we have teams on the ground that are creating content in language, in country. And it's paying off.

[Operator]

Your next question comes from Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne, analyst]

I want to ask about the upfront and then also about the streaming subs here in the third quarter. David, obviously, there's tremendous demand for linear television as we head into the fall season. Can you talk a little bit about whether Discovery was able to navigate some of the measurement challenges that Nielsen has created in the past around delivery and make goods? Were you able to do more non-Nielsen deals? Or do you think that's even cost the company any money in the past and maybe it's something we shouldn't be that focused on? But I know you've spent a lot of time on it. And it seems like the demand side of advertising is strong. I'm curious if you could just comment whether you guys feel like that's a headwind or you've sort of navigated around it.

And then on streaming. I don't know if this is for Gunnar or David. The 18 million number, I guess, captures probably the Olympic lift you got. And it seems like you're talking about most of your international launches coming in Q4. Just wondering if there is any other headwinds or tailwinds we should be thinking about in the third quarter. Or if we should think that there probably won't be a lot of growth here in August and September. Just anything you want to add as we think about Q3.

[David Zaslav, executive]

Thanks, Ben. Look, we have a big data operation. And the good news is on Discovery Plus and on GO, on our -- and to some extent, on linear, we've been working very aggressively to build our own data, and we've been working with the advertisers. And that has been extremely helpful. In the end, if we could have better data, you would see a dramatic increase, that's the future. It's the better data. Unfortunately, Nielsen is a lift. And it's just -- it's massively disappointing that Nielsen can't get it back together. And the answer is we have lost money. Everyone has lost money. It's just -- you're dealing with a very antiquated delivery system. We've all learned how to get along with it. We do it by augmenting it with our own data. But recently, they've just been wrong. I mean it's one thing if you have an antiquated system and then you augment it. But the antiquated system itself is unreliable. And so as an industry, and we've got to figure out how to deal with it. We're competing with the likes of Google and Facebook, where they have the best data, the cleanest data, the most -- and you compare that with this antiquated system. So we continue to work on our own. I don't have a lot of hope for Nielsen. I think somehow, it's an industry we're just going to have to work our way out of it from a technology perspective and leave them in the dust because they just they can't get it together. It's a shame.

[Gunnar Wiedenfels, executive]

And on the streaming, Ben, so look, one thing that we all need to keep in mind and that we've said so many times, it's very early still, right? We don't have a full year yet of a normal cadence. And that's just important to keep in mind. But what's very clear is that, obviously, there is a seasonality throughout the year. And the summer months, as you would expect, across video in general are not the strongest. And if you look at the numbers that we have reported, we've been able to add 1 million subs on average across these months, which, again, I think I'm very pleased with. And to your point about the Olympics, it's important to keep in mind that there is a certain amount of free trial in those. So our 18 million sub number does not include all of the subs that we are gaining or will gain through the Olympics. Yes.

[Operator]

And your last question comes from Alexia Quadrani with JPMorgan.

[Alexia Quadrani, analyst]

Just 2 quick sort of follow-up questions, one on advertising and one on your streaming service. On the advertising side, it's been incredibly strong, which you've highlighted, through the second quarter. We've seen that industry-wide including your results. I'm curious if you're seeing any cracks in the advertising strength and -- so far in Q3, just given the Delta variant and sort of the recent return of spikes in the pandemic. And then my -- the question really is just on the AdLite product that you have, that seems so much more profitable in terms of bringing more revenue. Is that where you're seeing the higher percentage of growth in terms of new sub adds?

[David Zaslav, executive]

Thanks so much, Alexia. We're not seeing any slowdown at all at this point because of COVID. In the aggregate, by the way, as a company, we're now about flat to where we were in '19, which is a big deal. So when we say we're up this percent or up that percent versus last year, just versus '19 in terms of level setting, we're about flat or just about flat to '19, which is a good starting point for us now to strive and drive to accelerate off of that.

The AdLite product as -- is extremely strong, but I don't think that we're breaking out how our growth is in the U.S. in terms of AdLite versus subscription. JB, are we breaking that out at this point?

[Jean-Briac Perrette, executive]

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

[Gunnar Wiedenfels, executive]

The only thing I may add on the advertising side, to state the obvious, the comps are obviously going to get a little tougher as we go into the second half, right? So we continue to see a very, very robust market, robust demand, no signs of COVID breaks. But obviously, we're now comparing to a slightly higher baseline in 2020. And we also across the market, obviously, had a little bit of a tailwind from political advertising, as I pointed out earlier. So those are 2 factors to keep in mind.

[Operator]

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