Warner Bros Discovery Inc (DISCA) Q1 2023 Earnings Call Transcript

Warner Bros Discovery Inc (NASDAQ:DISCA) Q1 2023 Earnings Call dated May. 05, 2023.

Corporate Participants:

Andrew Slabin — Executive Vice President, Global Investor Strategy / Investor Relations

David Zaslav — President and CEO

Gunnar Wiedenfels — Chief Financial Officer

JB Perrette — CEO and President, Global Streaming and Games

Analysts:

Doug Mitchelson — Credit Suisse. — Analyst

Robert Fishman — MoffettNathanson LLC — Analyst

Steven Cahall — Wells Fargo. — Analyst

Peter Zaffino — Wolfe Research. — Analyst

Bryan Kraft — Deutsche Bank. — Analyst

Jessica Reif Ehrlich — Bank of America Securities — Analyst

Matthew Thornton — Truist Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the Warner Brothers Discovery Inc. First Quarter 2023 Earnings Conference Call.

[Operator instructions]

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

Andrew Slabin — Executive Vice President, Global Investor Strategy / Investor Relations

Good morning, and welcome to Warner Bros. Discovery’s Q1 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO and JB Perrette, CEO and President, Global Streaming and Games.

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. 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 factors that could affect these expectations, please see the company’s filings with the US Securities and Exchange Commission, including but not limited to the company’s most recent Annual Report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q1 earnings release trending schedule and accompanying slide deck is available on our website at ir.wbd.com.

And with that, I am pleased to turn the call over to David.

David Zaslav — President and CEO

Hello, everyone, and thank you for joining us. We’ve had a very busy and productive year thus far. And while we have lots more to do and more to attack, we are aggressively doing just that. The diversified nature of our company continues to provide a strong foundation that enables us to weather challenging environments, like the one we’re in, and still generate meaningful free cash flow. We expected the marketplace to be challenged. And with clear eyes, we remain confident in our strategy and our ability to generate free cash flow and end this year below four times levered, with our streaming service as a tailwind.

Gunnar will take you through the specifics, but for some perspective, on a trailing 12 month basis, we generated $2.1 billion in free cash flow. Even after absorbing $1.2 billion in cash restructuring and merger-related costs.

Turning to the quarter. While Q1 is seasonally our weakest and we saw a challenging revenue headwinds, mainly on the linear TV and Studios sides, we are on-track to achieve this year’s financial targets. And we see a number of positive proof points emerging across our businesses with direct-to-consumer, perhaps the most prominent. We have strong command and control of our DTC business. We made a meaningful turn this quarter, generating $50 million in EBITDA and adding 1.6 million new subscribers, and we feel really good about the trajectory we’re on. We now expect our US DTC business to not only break-even ahead of schedule but to be profitable for the year 2023, this year, a year ahead of our guidance.

And it’s worth noting, HBO Max and Discovery Plus are still only available to less than half of the global streaming market. So there is significant runway ahead of us and we are attacking this opportunity. Max launches here in the US on May 23rd, with Latin-America to follow later this year and markets in EMEA and APAC in 2024. And the service looks terrific. And is a broad and compelling offering for everyone in the family. We anticipate having a healthy pipeline of our new content added to Max monthly. And recognizing that one of the real advantages we have as a company is the strength and depth of our franchises, including Harry Potter for a decade, Game of Thrones and DC. We are delivering on our commitment to reinvigorate the best of them with new exciting stories for fans around the world.

While at launched the Max offering will feature the full range of entertainment, this is really just the beginning. We are actively working on options to expand our lineup to include news and sports. Acknowledging that this live programing has the power to keep consumers coming back for more and staying longer. We look-forward to sharing further details with you in the months ahead.

As part of our marketing campaign under our One Company strategy, we are taking full advantage of the range of available media assets company-wide, to include our US cable networks and our popular digital outlets, like Bleacher Report and CNN.com. We’re planning to rollout Max in most key markets around the world. In an effort to reach the broadest possible audience and in keeping with our second strategic pillar, to monetize our content and the most financially advantageous ways, we are also going to continue pursuing other licensing and output deals in markets where either that makes better strategic and financial sense or HBO Max isn’t currently available, often with plans to eventually launch Max when we’re ready. Our recent deals in Canada and India, for example, are very lucrative with no expenses against them. We already own that content. How we serve consumers is important. But the wealth of our media assets brands and IP, and our ability to deliver diverse high-quality content that viewers want to watch and will pay for is what truly differentiates us and makes the opportunity we have to drive real value so compelling. It’s the reason we brought these two companies together.

This year we celebrate Warner Bros. 100th anniversary. This studio is historically been the crown jewel of the industry and we are working hard to rebuild it to its former glory. We’re driving meaningful creative momentum with more-and-more of the most talented storytellers in the business choosing to partner with us.

On the film side, after a very challenging year at the box office, we are excited and optimistic about the slate of movies coming, Dune 2, Barbie and DC’s Blue Beetle and the Flash. We screen the Flash at CinemaCon last week and early reactions have been overwhelmingly positive. We are committed not just to expanding the size of our film slate next year, but even more important, we are committed to making great high-quality films that have an impact. As I’ve said many times, and we believe it, it’s not about how much, it’s about how good. One of the real strengths of our company is the diversity of our storytelling. And in this centennial year, we’re especially excited to be reinvigorating our feature animation business, which has a long history and a wealth of great IP.

Bill Damaschke, the former Head of DreamWorks Animation has taken the helm of our film animation group and is hard at-work, together with Mike and Pam, developing a new slate. While at DreamWorks, Bill oversaw hit productions, including Madagascar, Kung Fu Panda, How to Train Your Dragon and The Crudes, and is a great addition to our all-star team.

On the interactive side, we’re also seeing continuing momentum in our gaming business, Hogwarts Legacy has amassed more than $1 billion in retail sales and over 15 million units sold worldwide to-date, and today, the team is launching the game on PlayStation 4 and Xbox One platforms. This is our 5th one billion-dollar plus gaming franchise alongside Mortal Combat, Game of Thrones, our LEGO games and DC. And there’s lots more games coming, including Hogwarts Legacy on Switch later this year.

Another area we’re very focused on is ad sales. While our results for Q1 continue to reflect the current soft ad market, we are optimistic for a gradual improvement and an eventual upturn in the second-half of the year. In a couple of weeks, we’ll host our Upfront. Last year’s Upfront was right on the heels of closing of our merger. And since then, we’ve refined our sales organization and our approach. And the team is executing against what we believe is a strong strategy. We are also advantaged by the diversity and strength of our ad-supported platforms, in particular, sports and streaming, our two key areas for this year’s market and we are extremely well-positioned in both.

Looking ahead to the next couple of months, we’ll host the NBA Eastern Conference Finals in a few weeks. Given the four teams in the mix, it’s shaping up to be a great series. And in June, we’ve got the Stanley Cup Finals on TNT. The first time ever that one of the four major professional team sports will air its final series solely on a cable network, we’re very excited about that.

On the direct-to-consumer side, we now have more than 15 foundational advertising partners, purely on HBO originals, something you couldn’t buy just three months ago, and a truly unique offering for brands. The Mercedes-Benz title sponsorship of succession is a good example and first-of-its-kind opportunity. The combination of impactful campaigns and a limited ad watching experience for consumers. On average, ad-supported subscribers will see one to two minutes of ads per hour, represents a real win-win for all involved. When you consider the quality of the service the attractive price point and the limited amount of advertising, it simply can’t be beat. We’re also providing huge value to advertisers by creating these Sunday night buzzy shows, like Euphoria, Game of Thrones, The Last of Us, and of course, Succession.

These shared experiences enable advertisers to build the desired reach quickly. This is expected to be a big year for news as well, with the presidential cycle kicking off soon. We anticipate real growth out of CNN. Will be selling heavily into the Upfront for town halls, primaries and conventions.

Needless to say, we’ve got a lot of irons in the fire and this busy year is looking to get even busier. We’re driving leverage down, generating free-cash flow and continuing to build a sustainable business for the long-term. And as the macro-environment begins to improve, we believe, given the efficiencies we’ve put in-place, command and control, and our diversified portfolio of media assets storytelling IP and talent, we are strongly positioned to achieve even higher free-cash flow and EBITDA heights and ultimately meaningfully grow shareholder value. And now, I’ll turn it over to Gunnar and he’ll take you through the financials and the specifics of the quarter and what’s ahead. Gunnar?

Gunnar Wiedenfels — Chief Financial Officer

Thank you, David and good morning. On-balance, I’m very pleased with where we are and very encouraged by the progress of our priority initiatives, which are all moving forward as planned. We generated 12% constant-currency EBITDA growth this quarter, a strong starting point for the year and also the first-quarter of EBITDA growth since closing the merger. I remain confident in our guidance of adjusted EBITDA in the range of low-to mid $11 billion. And 1/3rd to one-half conversion to free-cash flow, with net leverage at the end of 2023, comfortably below four times.

As always, there are a number of moving pieces and this quarter is no exception. So I’d like to address the key puts and takes impacting our results and outlook. Starting with DTC. As we enter this next leg of the journey, kicking off with the launch of Max on May 23rd, we’re already very pleased with the traction we are seeing, having generated $50 million of EBITDA this quarter. Perhaps more importantly, we’re continuing to see improvements across key operating KPIs, such as in our retention metrics. We also added 1.6 million subscribers globally, in-part due to the strong creative success of The Last of Us. We’ve driven a healthy amount of lasting efficiency improvements across this business through the initial phase of DTC integration. In fact DTC operating expenses were down over $760 million or 24%, excluding FX on a pro-forma basis in the first-quarter. All of this now provides much greater clarity on the path forward to establishing a sustainable platform setup for dynamic and profitable growth for years to come.

As we re-launch here in the US and plan additional launches later in ’23 and ’24, we continue to be guided by a focus on prudent and rational investment. Additionally, we’ve benefited from greater insight into the efficiency and effectiveness of our marketing efforts over the last 12 months. And we’ve seen that we can do more with less. As JB noted during our president, we will undertake the largest marketing campaign in the company’s history to support the launch of Max, this was, of course, anticipated in our internal budget and guidance. We will continue to focus on driving efficiencies throughout our DTC non-content cost structure, as we launch Max around the world and get more-and-more of our digital products on a common platform. As such, we expect the DTC segment that continue to show improvements with peak EBITDA losses for the year in the second-quarter. And when I say peak I’m talking around $300 million or so.

In fact, we are tracking ahead of our profitability target and now expect to be profitable in the US on a full-year basis this year. That is a full-year ahead of our original plan breakeven in 2024. And I remain ever confident in our outlook of generating $1 billion or more of profitability in 2025 globally.

Finally, I’d like to remind you about the approximately 4 million overlapping subscribers between HBO Max and Discovery Plus, consistent with what we outlined for you last summer. While we intend to keep Discovery Plus going as a standalone product, we expect a large portion of these 4 million subscribers will likely churn off discovery plus, the exact cadence of course being unclear at this time, but we do expect a fair amount of it to happen in the first few months after launch.

Turning briefly to the other segments of our portfolio, starting with the advertising market. As expected, we did see a modest sequential improvement in Q1 when adjusting for the Olympics. And we do see this underlying trend continuing into Q2 on a like-for-like basis, that is, after accounting for the NCAA Men’s Final Four last year and the Stanley Cup Finals this year, which combined will account for a net 200 basis-points headwind to global networks advertising revenue. While we see this as encouraging, visibility remains limited and the improvement is gradual. Though the market remains challenged, we are cautiously optimistic particularly coming into the Upfront, which will take place over the next couple of months with discussions ongoing, we will soon have a much better handle on Q4 and the 2023-2024 season.

We see a particularly strong advertising opportunity on Max, both with respect to the more traditional ads on shows like Friends and Big Bang Theory, as well as the very impactful and high-profile. opportunity on Max Originals. You will hear lots more about this at our Upfront presentation in a few weeks. Recall, this really only kicked-off in February and we’re moving slowly and deliberately ensuring a high-quality rich advertising experience, and we see significant further upside for this product-line, particularly when the advertising market improves.

Briefly on our international markets. On the whole, they continue to perform relatively better, led by key markets like Poland, the Nordics and Italy, with the UK, Germany and Brazil on the weaker side. So, as in the US, there is limited visibility.

In the Studios segment, there are a number of moving pieces that will be helpful to unpack. Obviously, Hogwarts Legacy was the key driver here, having performed amazingly well. It is thus far the best-selling game across the industry, with over $1 billion in retail sales and it is on-track to be a top game for all of 2023.

Studios results were, however, negatively impacted by disappointing box office performance, and this was exacerbated by a very difficult comparison against the success of the Batman last year. Similarly, TV licensing revenues declined Year-over-Year against certain large deal in Q1 of 2022. As David mentioned, we’re coming up on the 2023 summer slight and early reviews and tracking for The Flash premiering June 16 and Barbie on July 21st, look very promising. Both titles have enjoyed major buzz and we are leaning in. Keep that in mind for the second-quarter, when the Studios segment will see the expense associated with these marketing campaigns by the revenue opportunity largely impact Q3 and beyond.

Now let me provide some color on free cash flow, our financial Northstar, as you know. As a reminder, free cash flow of negative $930 million in Q1 of this year, is not comparable to the positive $238 million reported last year, as the latter represented Discovery as a standalone company. And while our first-quarter free cash flow was negative, as guided to on our fourth-quarter earnings call, we have made significant progress with strong improvement versus the underlying trends in the prior year, when Warner Media had heavily negative free-cash flows.

A few additional key factors to keep in mind. First, Q1 for both legacy companies has always been the seasonally weakest quarter, in-part due to the cadence of the production schedule over the year and the timing of certain payments such as for sports rights. Second, Q1 and Q3, carry the additional burden of the semiannual coupon payments, in large part for our merger bonds and impact of over $800 million included in our Q1 free cash flow. Lastly, Q1 also contains significant and expected cash-out from restructuring and integration costs, close to $500 million during the quarter. Given the quarterly puts and takes, I’d like to point to the trailing 12 month free-cash flow to give you a better sense of the true run-rate. Our trailing 12 month free-cash flow is now at $2.1 billion with a very clear path to our guidance range. The key drivers for the balance of the year are, number one, expected adjusted EBITDA growth, back-end loaded this year as transformation initiatives continue to unfold and hopefully, with a little help from the ad market backdrop, even though I should say. I have confidence in our guidance range even if ad sales don’t fully recover in H2, against a much easier prior year comp. Second, seasonally positive change in working capital versus the drag in Q1. Third, a significantly narrowing gap between cash content spend and amortization, as our DTC business absorb sequentially higher amortization expenses and we deploy content cash with a more-and-more rigorous focus on ROI. Finally, the cash benefit from key transformation initiatives will be back-loaded over the year while cash-out for restructuring and integration will be more front-loaded. In fact, our trailing 12 month free-cash flow number at the end of Q1 contains $1.2 billion of restructuring and merger-related cash costs in this line-item. We expect that these factors will contribute to a higher conversion rate in the second-half of the year and likely, again with a disproportionate amount in Q4, not unlike our nearly 100% conversion rate in the fourth-quarter of last year.

Looking ahead to the second-quarter, we are expecting to see a significant positive swing from negative $900 million in Q1 to around positive $900 million for roughly cash-neutral, maybe positive H1 free cash flow overall. This will support further debt reduction this quarter on our way to sub four times leverage.

Separately, as you will see in our 10-Q, we temporarily drew down $750 million on our revolver in April to accommodate the intra-quarter timing of certain sports rights payments. I expect this to be fully paid down by the end of this month.

To sum-up my discussion on free cash flow. The level of transparency into and focus on free-cash flow and its drivers has changed dramatically over the past 12 months, and we are in a strong position to capture this tremendous value opportunity over the course of 2023 and beyond.

In closing, as we lapped the one year mark since closing the merger, candidly it feels like three. I do come back to the statement I made a few months ago that we’ve turned the corner at WPD. I continue to view the structural heavy-lift as more behind us then in front of us. And I see more-and-more opportunity with every day I am spending with the iconic brands and the massive global footprint of this combined company, with billions in efficiency gains already in implementation, we really are still in the early innings of unlocking the full potential of Warner Bros. Discovery. We remain as well-positioned as any to lean into the many avenues of growth in front of us.

With that, I’d like to turn the call-back to the operator, and David, JB and I will take your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session.

[Operator Instructions]

Your first question comes from the line of Doug Mitchelson with Credit Suisse. Please go-ahead.

Doug Mitchelson — Credit Suisse. — Analyst

Thanks so much for taking the question. David and JB, I think most interesting, how would you define success for the launch of Max or the relaunch of Max as you want to define it? I think, there’s lot of discussion in terms of choosing Max as a brand and the need to build that or rebuild that, David you mentioned actively trying to include News and sports in the lineup and so, I just curious whether it’s engagement, whether it’s subscribers, whether it’s ultimate profitability? How should investors think about what to expect from Max in the coming quarters?

And Gunnar, I think you made some strong statements in your prepared remarks, but obviously, a lot of investor focus on free cash flow generation and balance sheet here, and I guess the just general question is, what’s your level of confidence in the balance sheet targets over the next couple of years and what gives you that confidence, especially with the year being back-end weighted? Thanks so much.

David Zaslav — President and CEO

Thanks, Doug. So we’re excited about the 23rd. And look, we’ve turned the corner on our streaming business. We had a different view of it. We’ve — we’ve focused on it very hard and we built what we think will be a very strong Independent business and it starts with profitability. And so we made $50 million this quarter. Our US streaming business will be profitable for the year and we have real scale. And so, and when you run a business, you’re looking for growth, which we’re going to get in the streaming business, and we’re driving to get throughout the company. And there are a number of areas where we think that we’re, as we know that as the economy improves, we’ll see real growth. But the key here is, our US stream business is no longer a bleeder. It’s hard to run a business when you have a big bleeder. And so, getting this business under control, focusing on what people love to watch, how do we create content that people love. And now, as we launch Max, we’ll be able to nourish and delight subscribers with the greatness of HBO, which on Sunday nights is really a cultural moment, whether it’s White Lotus, House of the Dragon, The Last of Us, Succession and then put it together with Discovery, which has Discovery — the Discovery content, which has been really strong for us.

So, number one, we want an easy smooth transition. That’s why we’re not doing anything with pricing, we focused very hard on letting everybody know how to make that transition. We have a — right now, we have a really good hand. And so let’s make the transition. We’ve got technology that’s far superior in terms of delivering the platform itself and how it can work against all this great content, but let’s do a smooth transition and then have people discover the quality content, the diversity of content and the quality of the platform itself, which will only accelerate growth. JB?

JB Perrette — CEO and President, Global Streaming and Games

Yes. I think, Doug, just to add on to David, I think in the very near-term migration success is sort of one key metric, are you getting the customers who are on HBO Max today successfully migrated over to Max? And then over time, there’ll be three other metrics and a fourth that will come, the three would be brand awareness, obviously, we’re building a brand with Max, now that is new, that has a different proposition, a broader proposition for something for everybody in the family. Number two, customer satisfaction. Number three, engagement. As we talked about on April 12th event, a lot of it is around seeing all this content coming together and the breadth of the proposition driving higher utilization and therefore, helping retention. Those I think are core ones in the initial few months and then over time, obviously, as that flywheel continues, we obviously want to see subscriber growth and scale as the additional metrics. So those are the ways that we look at success.

David Zaslav — President and CEO

Right, and Doug, on the free cash flow question as you — as you just heard me say in the prepared remarks, I have — I have a high-level of confidence in our guidance and our ability to deliver here and taking a step-back, there is no doubt the environment continues to be challenging. We’re working against pretty significant reductions in ad sales. And as I laid out, we see a gradual improvement for the second-quarter, but it’s gradual, so, so there is that. But what you’re also seeing in our results is what we refer to as a built-in hedge, right. We’ve got a great game, Hogwarts Legacy, box office was a little weaker, but across the entire footprint of the company, managing as one integrated company, we have enormous opportunity, and so we don’t want to be in the business of predicting ad-market developments in the second-half, as I said. I am confident in our guidance without assuming a complete turnaround here because we’re focusing on what we know and what we know is the control that we have over the initiatives that we put in-place over the past 12 months and they are — we’re knocking them out month-after month, quarter-after-quarter. We’ve got systems coming online, we’ve got individual workflow that are going from from 10 to 12 hours a pop to three three minutes. I mean there’s a lot that’s happening and we have clear milestones scheduled out for the rest of the year and looking at that, I will — I have great confidence that we’re going to continue to deliver these these improvements and as I pointed out earlier, on the cash flow side, it’s even more exacerbated than on the P&L side, with the seasonality of our free cash flow. And the $930 million in Q1 was pretty exactly in-line, actually a little bit better than what we had budgeted for and with that, I have full confidence we’re going to deliver free cash flow.

Doug Mitchelson — Credit Suisse. — Analyst

Thank you.

Operator

Your next question comes from the line of Robert Fishman with MoffettNathanson. Please go-ahead.

Robert Fishman — MoffettNathanson LLC — Analyst

Hi, good morning. I have one for David and one for JB or Gunnar. First, David, can you expand on the strategy you mentioned in your prepared remarks. And maybe that financial benefit of licensing your HBO and Warner Brothers library content internationally and some of the deals you discussed? And how do you balance those licensing deals with your ambitions to scale Max outside the US, if and when you choose to launch in those markets?

And then for JB and Gunnar, on DTC, anything you can share about the DTC retail versus wholesale trends, noticed the wholesale revenue dragged down overall DTC revenues and just whether that wholesale pressure should continue throughout the year? Thank you.

David Zaslav — President and CEO

Thanks, Robert. We are, we’re focused on taking HBO around the world. The fact that we have real scale around the world, that we have content in every language, we have channels in every country to promote is a real advantage for us, but we’re really driven by free cash flow and long-term free cash flow growth. And so, if there’s a market like India, where we could — we could structure a deal where we can make a lot more money by licensing our great content in that market, with an option, which we always have at the end of that deal to take another look at that country with our platform that’s already built. We’re not building a new platform for each country and see if we can go in ourselves, can we generate more long-term profit and free cash flow?

And so it’s really an economic analysis. You will see in most markets, it will be us building asset value, owning it, driving it for long-term value and growth. You saw us do it at Discovery. We were the first outside the US, we were in 200 countries and it generated a long-tail of free cash flow and real EBITDA growth for us. So I’m very optimistic, we’re in less than 50% of the countries.

It’s very hard to have a business that’s profitable just in the US. I’ve always thought that you really need to be above the globe and that’s the advantage. That was the value-creation of the parent companies, that they had that scale. We own all of our content and the idea that we’re starting off by having a business that’s profitable this year, in the US, and then we go on this journey of driving it outside the US with a strong platform that’s already built. I think it bodes very well for us.

JB Perrette — CEO and President, Global Streaming and Games

Yes and Robert. I’d just add to what David said, there’s two filters as we look at it, there is the strategic filter and financial filter that David just talked about, which obviously, is pre-eminent, which is a market like India, if we don’t believe we can be profitable at a streaming service within a three to five year time horizon, at the end-of-the day, right now, that’s not going to be our priority focus. And so if there’s opportunities to license, take a bunch of money off the table to help support our growth initiatives in other markets where we think we can scale more profitably and more effectively, we do that, number-one. Number two, there’s just a practical reality that some of these licensing deals are done in markets where we’re just not going to be ready to launch from a platform perspective, as you talked — as David mentioned in his prepared remarks, we’ve got a timetable to rollout our new product and convert and migrate our existing HBO Max customers over the next 12 months plus. Then some of these things are going to take into ’25 and even beyond to launch in new markets for our platform to be ready. And so in the meantime, it just makes perfect sense for us to take as much money off the table as possible. And so, that’s the thinking.

David Zaslav — President and CEO

The added advantages in these markets, there’s still seeding our brands in those markets. So we’re getting value. The brand itself is being driven as quality curated and then we have the hand-off when we think that market can be profitable.

JB Perrette — CEO and President, Global Streaming and Games

And we have — sorry, one other thing I’d say is, in all these deals, oftentimes, what we’ve done, which is better than what we have in existing licensing deals, is ensuring that when those deals expire, we have stronger cliffs for the content to come back, so we can actually, when we’re ready to launch, if we assume we’re going to launch in those markets at the end of those deals, we get more of our content back immediately.

Gunnar Wiedenfels — Chief Financial Officer

Well, the only thing. I would add is, on your revenue growth and wholesale question, two things to keep in mind, number one, Q1 had a bit of an overlay with content sales revenues and as we pointed out in the prepared remarks, obviously, the ad market, also on the digital side isn’t the greatest right now. I see a lot of upside opportunity here as that market comes back. And specifically, for wholesale, remember that our subscriber base contains the linear HBO subscribers there are obviously showing similar trends to what we’re seeing in other parts of the linear ecosystem. Needless to say, we expect the total to be a growing business. We’ll see how the launch goes in May. We’re looking-forward to getting that product out, I pointed out some of those overlapping subscribers. We’ll see how those wash out, but we’re definitely looking for revenue growth for the second-half of the year and then many years to come.

Andrew Slabin — Executive Vice President, Global Investor Strategy / Investor Relations

Great. Next question.

Operator

Your next question comes from the line of Steven Cahall with Wells Fargo. Please go-ahead.

Steven Cahall — Wells Fargo. — Analyst

Good morning. Maybe first, David, and JB on DTC profits that are tracking ahead, just curious what’s performing ahead of your expectations there, is it the subscribers and revenue, is it more about the cost-reduction? And I know you’re new into the Max launched domestically, but I’m just curious if you’re seeing legacy HBO subscribers, which I think, David, you were talking about on CNBC this morning if you’re seeing those folks engage with the Discovery content. It’s kind of in different genres, but I know that’s the hope. So just wondering what kind of early trends you might be seeing there?

And then Gunnar, on the adjusted EBITDA guidance for the year, I think it’s still implies low $11 billion, from your comments, it sounds like the macro is still a little tough, but you’re bullish with the incremental US DTC profits. So I’m just wondering with DTC performing better and no change to that guidance, is there anything that’s performing worse or is that better just kind of in the range as we think about all those different components? Thank you.

Gunnar Wiedenfels — Chief Financial Officer

Let me to start with the second, with the guidance quickly, because you’re right, obviously, the DTC point is a big, big positive driver here. The most important point as I laid out is, we have very clear visibility into our transformation initiative and the impact that’s going to have on the cost base, also for the studio, definitely, a support here for the second-half of the year, very strong summer slate that we’re really looking-forward to launching, and the revenues of those are going to hit from Q3 onwards.

Again, don’t want to speculate about the linear business, but remember that the comp in the second-half is going to be much more beneficial, because especially the fourth quarter last year was pretty anemic in the scatter market and but at the end-of-the day, we still have a lot of shots on goal here and it’s a hit-driven business, especially on the studio side. That’s why we’re giving a range and I feel comfortable with that range with what I know today.

David Zaslav — President and CEO

When we think about Max, as we launch, we have real scale, quality content, a broader aperture. The real challenge is the churn. Very difficult to build a strong business with churn, the churn on Discovery Plus is quite low. The churn on HBO Max is high. And so driving that churn is as or maybe more important than driving the growth. If we can drive down the churn, the growth will be very substantial. And so we have a series of attacks in order to do that. The primary one is how do you know or some more people in the family? And the more people use it, we’ve seen that we’ve been at this in Europe for more than eight years, the more people that use it in the family, the more engaged people are, the broader the offering, the lower the churn. We also have a technology advantage now, in terms of catching people that want to buy the product that we weren’t able to reach-out to. And this is a business of artillery. We’re adding a lot of artillery here to the offering in order to get more — to get more viewers in the family engaged and excited about the the amazing quality content that we have, but we have more weapons. When we have sports, and we have news, and those are on the sidelines right now, we have a great product, we’re going to — that’s now going to be profitable for the year. Let’s drive that — let’s drive the brand and know that we have, we can move to the left and into to the right with sports and news, which we’ve done in-markets in Europe, which has been additionally advantageous. JB?

JB Perrette — CEO and President, Global Streaming and Games

Yes, Steven. To echo what David said, we’ve seen it across multiple metrics. We’ve seen it across retention, as David rightly pointed out. We’ve had in the first few months of this year, record-low churn on HBO Max.

David Zaslav — President and CEO

But the churn is still — is still pretty high.

JB Perrette — CEO and President, Global Streaming and Games

It’s still high, but we’ve been with the acceptable range in order to build the kind of business that we will build, yes.

And as we’ve talked about at the April 12th event. That was all done through kind of what I’d call a slightly more analog attack plan, we’re now getting to a tool and a platform as we launch, Max, that we think there’s a lot more ammo to be able to actually attack churn and more aggressive fashion. So we think we’re just at the beginning of that upswing.

The second is, we obviously had price rises in the US as well as a few of the Latin-American markets. And the reality is the great news there is we’ve seen much better reaction and much better retention as well on ARPU increases in those markets. And so that’s been a positive. We’ve seen efficiencies across-the-board in some of the items that Gunnar talked about. And then obviously, over time, we’ve started seeing some scaling. But we’ve been measured in our scaling. And so that’s been great.

And as it relates to the content, the cross-pollanization, reality is, we’ve done very little so far, but we have done stuff with Magnolia, for example, and as you’ve heard us, I think to what we’ve talked about before, it was a top 10 performer on the service at launch, and even at top-five in the initial week of launch. And so we feel very positive about what that means. And as we’ve cross-pollinated content outside of the US, we’ve seen similar trends of great reaction and reception from HBO Max consumers to Discovery Plus content. So when we go full throttle with it when Max comes together, we feel very optimistic.

Gunnar Wiedenfels — Chief Financial Officer

Steve, if I can just add one thing, from the perspective of the longer-term outlook here again, we gave guidance a year-ago. Around how we see this DTC business developing, as I said earlier today, many of the operating KPIs are tracking much better than what we assumed. Again, the big thing is getting this product launched and then we will learn so much about assumptions that are now assumptions and hypotheses and in two-three months, those will be backed-up by a lot more actual data. So this is going to be super important period, but needless to say, with the US breakeven and actually hitting profitability for the full-year happening this year, a full-year ahead, now remember, as we said before, we are obviously losing money in the business internationally, as we are launching market and as we are earlier in the the maturity curve in many of the international markets and that’s going to continue. But as I said earlier, we’ve got that $1 billion-plus guidance for 2025 for the entire combined business and we’ll update that on the basis of what we’re learning once the once the product is in the market.

Andrew Slabin — Executive Vice President, Global Investor Strategy / Investor Relations

Great. Thanks for the question

Operator

Your next question comes from the line of Peter Zaffino with Wolfe Research. Please go-ahead.

Peter Zaffino — Wolfe Research. — Analyst

Hi, good morning and thank you. On the subject of free cash flow, adjusted for one-time charges, you mentioned that the last 12 months, the company had produced a little over $3 billion free cash, adding that one plus of one-time charges to the two-plus of underlying. If your expectation is that synergies will contribute $2 billion in ’23, it seems like your free cash flow has an easy path to $4 billion, which is within your guidance range. I’m wondering if you’d add any significant puts or takes to that analysis and specifically, is the DTC upside that you described today, the idea that EBITDA will be $1 billion better than previously expected in ’23, incremental to the math I just laid out? Thank you.

Gunnar Wiedenfels — Chief Financial Officer

Peter, again, in the current environment, I wouldn’t characterize anything as easy, but I have very-very high confidence in the range that we laid out. We have confidence in the ability to generate these these synergies, you’re right on the trailing 12 month number, but it’s — it’s a lot of work, we have we have line-of-sight. And we’ll take it from there. I don’t want you to take this as an upgrade to our cash flow guidance.

David Zaslav — President and CEO

So we were the — I think, we were among the first to say that the advertising market was basically — was starting to be challenging. And so we have been pretty careful in projecting because you can’t, how an advertising market is going to turn and when it’s going to turn. And so for purposes of how we looked at this year, the market is quite challenging, it’s improved a little bit, but it still remains a really challenging environment. But the good news for us is, we’ve built that into our projections for the year and into how we talk to you about what this — what we’ll face this year and how we’ll perform.

Andrew Slabin — Executive Vice President, Global Investor Strategy / Investor Relations

Great. Next question.

Operator

Your next question comes from the line of Bryan Kraft with Deutsche Bank. Please go-ahead.

Bryan Kraft — Deutsche Bank. — Analyst

Hi, good morning. I wanted to ask you about Hogwarts Legacy, sales have obviously been extremely strong to-date, can you talk about what you expect for sales of the PS4 and Xbox One versions, which I think become available today. Maybe just relative to sales to-date, how much of a lift could you get?

And also, I wanted to ask how the next let’s say X hundreds of millions of dollars of sales would be –would look from a margin perspective relative to that first billion? Because I would assume that there is a lot less marketing and amortization running through in the second-quarter and beyond. So just wanted to ask about that as we think about profitability for the studio going-forward. Thank you.

David Zaslav — President and CEO

Thanks, Brian. We have a very, very good gaming business, with 11 different Studios and a real talented capability. But the real differentiator for us as a company is, we own our IP. And that IP belongs to us and we’re developing it, in some cases, we may decide to develop it with a third-party game technology company, but we may be the only media company that owns, whether it’s the DC Universe, Harry Potter, all of the content that we own, Game of Thrones, that’s for us to deploy and I think that’s particularly strategically important, because if you look at Hogwarts Legacy, a big piece of the success of that game, if you go into it, if you’re a player, you go into that game and you’re in that world. That’s kind of a new concept, before it was really it was gaming and it was storytelling. And now, I don’t — it’s very difficult to figure out what anyone’s definition for the Metaverse is, but when we launch a product as a motion picture or a long-form story on Max or HBO, and then we have a game, that game belongs to us, but now there’s this tweener, which is that may be in the next couple of years that we launch our Superman movie and then — then people spend more time and there’s more economics of people just hanging out in the Superman world and universe, and the fact that we own all that is something that I think is going to be really important as we look for — as whether — as technology develops and given the amount of time people spend on gaming, we don’t want to be in the motion picture and story and long-form storytelling business and have somebody else in the business of hanging out in those worlds, those world that they are going to be quite profitable in the years ahead.

JB Perrette — CEO and President, Global Streaming and Games

And Brian, to the Hogwarts Legacy, obviously, the gen 8 release is going out today. Is — it’s important, I would say, obviously, those consoles are a much smaller base than the current-generation consoles that we released back in February. So it’s obviously a much smaller portion of the whole, but nonetheless important. I think the other big call-out is obviously, the Nintendo Switch release which will come later this year, we see that as probably a much bigger install-base and a fan base that as it relates to the franchise of Harry Potter, which obviously appeals to a very big audience globally and a more — and in-markets like Japan where Nintendo has a big footprint and Harry Potter skews very strongly in terms of popularity. We see a much bigger upside probably from that release, certainly with the gen 8. So that’s kind of how we see the rollout over the next few months.

Gunnar Wiedenfels — Chief Financial Officer

And the margin profile, Bryan, is not going to change materially. We’ll be a little lighter on marketing obviously, retail price points are a little lower. So I from a gross margin perspective a little bit of a headwind, but no material change.

Bryan Kraft — Deutsche Bank. — Analyst

Thanks very much, appreciate it.

Operator

Your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities, please go-ahead.

Jessica Reif Ehrlich — Bank of America Securities — Analyst

Well, thanks. Two questions. So, David, if you step-back and think about the last year, where the heavy-lifting is done, integration and the restructuring, and now the focus is on operating and building your businesses, where do you see the most opportunity and maybe you can touch on timing beyond the existing business? You touched on games, but this I’m sure there is a bigger business plan? [Indecipherable], you’ve mentioned in the past, you were talking about driving your franchises deeper and animation, you just mentioned you hired a head of animation. So — and that’s a huge driver for Universal, so maybe if you could — maybe there’s something I’m missing.

And then secondly, on sports. You kind of alluded to it coming to Max, I don’t know if you can say anything more about that and maybe touch on the NBA, what do you think the timing is and ways to slice — are there ways to slice and dice the rates among the various players, so that you insure it’s a profitable contract in the next round?

David Zaslav — President and CEO

Thanks, Jessica. There’s when we look at this business, you’re exactly right. We reset the business for the future by looking at each company and saying what should this comp– how should we be structured to have the best chance for sustainable growth today? We took out a lot of layers, we built a new leadership team, but we still have a lot of the benefits that will be flowing through this year and next year and we’re still finding — we’re still opening up some closets and stuff, which I think is a good thing, more opportunity. And we’ve got some businesses that aren’t doing well.

Warner Bros. turns 100 and they’ve had two of the worst years, if you look-back at Warner Bros., it was really just very difficult, very difficult on every level in terms of what was turned out. And so we think we’ve turned the corner on that, we’ve got a very strong leadership team in place now. We got James Gunn, and Peter working very hard on DC, which is going to be a very big growth driver for this company. And so but very bullish on DC and you know — we — the Superman script first draft is done, Gunn is — he is on a mission from God. And I think it’s a really good moment for us to prove out on DC, what we got and how strong it is globally for long-term sustainable growth.

We got some more movies coming up that are better. We’ve been working hard on fixing them and enhancing them and investing. We said no movie before it’s time. With with Barbie and Flash, we have two very good movies, Dune two, very strong and so I think the slate coming up now, that will make a big difference. We’ve lost a lot of money in the motion picture business and making that turn is important. Continuing to build on Max and we haven’t done much with animation at this company. We own Hanna Barbera, Looney tunes, if you take a look at animation, t’s a critical — we have, we have three animation studios and we don’t have a lot of you know, production in terms of — it’s not productive in terms of free cash flow. It’s not productive in terms of market-share, it’s not productive in terms of growth. And so driving that, and we now have a a really strong leader, our leadership team is in-place. If this was Formula One and we’re dealing with a very difficult environment and it’s raining and the track is wet and it’s a challenge, we’ve got a leadership team of race car drivers here, in every case. And so we got a lot of confidence in Mike and Pam on the Warner Brothers side and the games business is just getting started, which I think is something that people didn’t really pay a lot of attention to, and maybe the most important portion is the fact that we have this great diversity of assets, it’s hard to predict what’s going to go on, but we’ve restructured this company now, we’re really tight. We’re really tight and we’re continuing to figure out how do we drive productivity, so we can invest more in storytelling. that’s all we do.

And right now, it’s sort of the environment is challenged, challenged, challenged. But as things start to pick-up, and they will, in different areas and we can’t predict exactly when. You’re going to see a very quick turn at this company. So the idea that we can end this year, drive toward, to be less than four times levered, with a very tight cost structure, with command and control of this business, with strong brands that people love around the world, and then all of a sudden, things improve a little bit and you will see an acceleration.

The NBA, look, I just saw Adam two days ago at the Nick game, go Nicks, the night at the garden. Well, I’ve been waiting a long-time for that one. And — but — we’ll — we’re doing a terrific job with the NBA, when you look at Barkley and Ernie and that team and Shaq. The programing we’re putting on. We’re setting records with the NBA, we’re setting records with hockey. We also have March Madness, where we did very well. We couldn’t do as well with the — with the marketplace because Sports is relatively strong, but sports used to be strong enough that it was also able to help you with the rest of the business and that was happening for a long-time, and the market was just quite soft. And so we’re able to take advantage of the sport. But we weren’t able to take advantage of the piggyback halo and I think that’s true in the industry, it just got more difficult, but between baseball playoffs, March Madness, hockey, we have, we have long-term deals that are quite favorable to us. We like the NBA. The deal’s coming up in ’25, there’s lots of, lots of ways it could be conjugated, you know, we did a very favorable deal in the UK with our BT Eurosport business, where we ended-up with 90% of the football — the soccer games and Amazon got less than 10% of the of the Champions League games. We produced that content for Andy Jassy and they promote to us, we promote to them and the economics of that deal very favorable for us.

And so there’s lots of ways to re conjugate it. We like the NBA, we hope we can get there, but we’re going to be very disciplined. We worked very hard to build this company to drive profitability, to have a strong balance sheet, to provide real growth and real free cash flow, that’s the long-term sustainable nature of this great company and we’re not going to jeopardize that for any piece of IP.

Gunnar Wiedenfels — Chief Financial Officer

I would like to add one slightly less strategic or operational point, that nonetheless I think is super important, Jessica and that is our — for the sake of the argument, we’re spending $20 billion of content, a lot of that still goes through siloed systems, still imperfect processes, and in many cases, still through a mindset that’s very business unit oriented. So I have no doubt, we’re in the very early innings of looking at this as one Warner Brothers Discovery content.

We talked a lot about the stuff that we discontinued because it didn’t make sense financially. I think the opposite is true as well. I think the Company also passed on very-very interesting and attractive investment opportunities, just because someone into our company budget wasn’t in-place or. So all of that is going to change, will get much better in allocating capital as a company and we’ll get much better in the day-to-day operational management of spending of that cash. We just harmonized those processes and centralized those teams, they were all fragmented. So looking at that, the ROI on our capital in the ballpark of $20 billion, hopefully growing over the next few years, is set to improve and I have full conviction in that.

David Zaslav — President and CEO

When we talk about our marketing campaign, one of the things to bear in mind is, we’re using our platform now. That wasn’t happening in — we’re really hyper-focused. As I’ve said on many nights now, we’re getting 48%, 45%, close to 50% of all viewership, broadcast, cable. On any given night, we have 25% to 30% of viewership on the platform and using that — using Bleacher and House of Highlights, which is a very young demo, using CNN.com, so yes, yes, we’re — the campaigns are bigger, but we’re one company. And so the ability to promote on HBO on our own platform is a big savings. It’s a big savings for us internationally and we’re deploying it.

Andrew Slabin — Executive Vice President, Global Investor Strategy / Investor Relations

Great. Let’s go to the last question please.

Operator

Your last question comes from the line of Matthew Thornton with Truist Securities, please go-ahead.

Matthew Thornton — Truist Securities — Analyst

Hey, good morning everyone, thanks for taking the question. Maybe a couple on Max, if I could. Could you update us just how you’re thinking about migration later this month, in terms of any friction as folks go from one app to the next? Your latest thoughts on any potential friction there and how you’re managing that?

Secondly, you talked about the overlap of Discovery Plus users that also have HBO Max. What about those that don’t, how you’re attacking and trying to up-sell those to the the more the higher price point Max service? Any color there.

And then just final one, I think this was mentioned on a prior question, but any thoughts around a fact here and just how to think about the fact here around Max helped drive top of funnel, help drive advertising, help monetize deep library any incremental updated color there would be great as well. Thanks so much.

David Zaslav — President and CEO

Yes, thanks Matthew. Just on the migration point first. A couple of — couple of things, number one is, remember there has been no change in the billing process. So as it relates to revenue, there is no change and there is no migration as it relates to billing. So revenue and billing continues to be exactly the same, irrespective of whether somebody has actually clinical migrated, i.e. accepted the new app or downloaded the new app if they need to. Number two is, as we said at the April 12th event, there’s a large portion of the basin that will have to do absolutely nothing, where the app will automatically convert and upon streaming again you’ll have accepted the terms of use and you’ll be off and running. For the portion of the base that actually has to download, re-download. We’ve done everything we can to make it as seamless as possible, including not having to input — basically two clicks to get to the — to streaming again your video content, you have no need to — your username, password will be migrated, your watchlist, all your history will be migrated and so we tried to make everything as possible. Now, inevitably, in these processes, you’re going to find some friction. But we think it’s fairly limited in terms of the subscriber risk associated to the migration. And so we feel very good going into it. We’ve tested it, we’re already for the migration. And the flip side is on then switching to the Discovery Plus as Gunnar said, we do see about 4 million subs, largely in the US, but there is some of that internationally as well, that overlap between the two services and obviously, we’re gonna be doing everything we can to upsell those that are not subscribed. But as we said, again, the flip side is, we’re not going to be too in-their-face about it, at the end-of-the day, if people want to stay subscribed to Discovery Plus and that’s the environment they prefer, that business by itself is profitable and we will continue to maintain it and serve them there, but we will over time, initially through marketing efforts, try and see if we can get them to come in and sample it, we will have offers that incentivize them to sample it for some period of time at favorable economics and we’ll see how successful we can be in upgrading them.

JB Perrette — CEO and President, Global Streaming and Games

On fast, we always believe in what we call a hybrid strategy, which is ultimately first and foremost, kind of what we call channel syndication, which is ultimately, we realize that the platforms and the distributors out there, there are many who have the scale and the size and we want to get our channel portfolio out there and viewed, as it’s audience aggregation and advertising business. We’ve already gotten out with Roku and Tubi, and we’ve been very pleased with the initial success with a very small, but a handful of channels that we out there already. We will continue to look to see if we can increase that volume, to your point for a second, third, fourth monetization windows for certain content. And then we are continuing to explore the owned and operated strategy and at some point in time, longer-term, we do see this opportunity for the WBTV brand and platform to exist in an owned and operated environment. I think at some point, that’ll be dovetailed with the state of the advertising business and we want to make sure we come to market at the right time when the demand is sufficient, but we will continue to execute this hybrid strategy of syndicated channels initially and then over time, at the right time launch our own service.

Andrew Slabin — Executive Vice President, Global Investor Strategy / Investor Relations

Great, that’s it, thank you very much for joining and we will speak with you soon.

Operator

[Operator Closing Remarks]