Warner Bros. Discovery, Inc. (WBD) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Discovery Inc., First Quarter 2021 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Also, please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.

Everyone, thank you for joining us for Discovery's Q1 Earnings Call. Joining me today are David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perret, President and CEO of Discovery Networks International. You should have received a copy of our earnings release, but if not, prefer 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'll open the call to take questions. Before we start, I'd like to remind you that comments today regarding the Company's future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the Company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2020, and our subsequent filings made with the U.S. Securities and Exchange Commission. And with that, I'd like to turn the call over to David.

Good morning, everyone, and thank you for joining us today to review both our Q1 performance and the meaningful progress we are making since our launch of discovery+ across our operating segments, brands and global markets. I couldn't be prouder of how our company has executed, near flawlessly, responding with creativity, precision and focus across the board, while at the same time, accelerating the pace of innovation throughout our organization as we embrace substantial growth opportunities around the globe. We continue to reposition the Company and put it on a path of sustainable growth for the long term. Our ability to generate free cash flow is crucial, allowing us to fully fund our pivot and underscoring the efficiency of our model. Indeed, even during this moment of increased investment, as clearly evidenced in our financials this quarter, our free cash flow machine is working harder than ever, and it is reinforcing an evolving narrative about Discovery's differentiated hand. With the strong global launch of discovery+, we are now scaling a very well received global direct-to-consumer offering that complements our incumbent linear channel presence in every television market around the globe. In Q1, Discovery had the most watched domestic pay-TV portfolio.

Thank you, David, and good morning, everyone. My aim this morning is to provide a slightly more detailed peak into the operating model as well as our near-term outlook than what we would more normally do, in large part given the recent volatility. To the extent that this has created additional questions and/or concerns, my goal would be to help alleviate it as possible this morning. 2021 is off to a great start. As David just mentioned and which I'll provide a little more context around KPIs, particularly in the U.S., where we launched at the beginning of this year, across engagement, monetization and churn and implied customer lifetime value continue to reinforce our belief that prioritizing investment in discovery+ will generate superior returns on capital. As noted, engagement is truly stellar with viewing subs watching roughly three hours of content per day, well ahead of linear and nationally, an underlying contributor to both retention and monetization. And retention is indeed looking very encouraging with churn coming in quite a bit lower than we had initially anticipated. While it is still too early to evaluate a stable monthly churn rate, the retention curve of our first subscriber cohorts are looking very encouraged. Based on these early observations, we expect trend towards low single digits over the course of the next 12 months. Turning to monetization, which is also well ahead of plan. Then the ARPU for discovery+ in the U.S. is already in line with our $7 linear channel going by the strong monetization of the AdLite product where ARPU has already exceeded $10 in the first quarter. Clearly, strong engagement in watch time despite offering only a 4 million amending themselves to healthy advertiser demand and return exceptional CPEs. Still early days, though we see a notable path for further monetization as we continue to scale and drive additional engagement, attract additional advertisers and brands and roll out new advertising products. Global ARPU is over $5 away with international ARPU as expected below that of the U.S. This is in part due to the market price points and in part because we are launching the greater share of our subscribers coming through promotional partnerships, which drive faster adoption and marketing efficiency, but also come at an initially lower ARPU. That being said, we are in virtually all cases to see ARPUs that are multiples that both the existing wholesale linear pay-TV at which we currently monetize it. This, of course, is a core tenet of our international discovery+ strategy and a great objective testament to the quality and value of our content in the marketplace not limited by the boundaries of traditional pay-TV ecosystem.

Your first question comes from Robert Fishman with MoffettNathanson. Your line is open.

Full year core, U.S. affiliate fee growth after excluding next-gen revenues for the full year? And then more broadly, have you seen any pushback from launching discovery+ in domestic affiliate fee negotiations? And maybe if you can talk to whether the launch of discovery+ on Xfinity should be viewed as incremental or cannibalistic to your overall partnership with Comcast? Thank you.

Okay. So let me take -- let me start with that last question. The -- we're super excited about the upcoming launches here. As you have seen in our numbers, if you do the math, we've been adding about 1.5 million subscribers on a monthly basis over the past two months here. And I do want to point out that these numbers are going to be moving around a little, but the Comcast launch is going to be one very positive event. And to answer your question, I do think there is a significant incremental impact. That's what we've seen with other deals coming online after launch. So that should be a positive. And we also look at other events happening internationally over the next couple of months that could further support the subscriber growth here, most importantly, obviously, the Olympics coming in internationally. And so that's for the subscriber trend here. To your other question on the U.S. affiliate side, again, as I just laid out, we're super happy with what we're seeing for distribution across the entire ecosystem here, clearly seeing very healthy and accelerating the contributions from discovery+ and our D2C efforts overall. But we're also looking at a very healthy underlying trend in the core business. You saw the linear subscriber numbers, which have again been a little better than maybe over the average of the past 18 months or so, with only 2% down for our core networks. And as I said, we've continued to enjoy roughly mid-single-digit growth here in the linear part of the ecosystem. Yes. The -- your question about renewals and impact of discovery+, look, as I said, we are continuing to get fee increases. That's one of the reasons we have been able to continue the growth that we have delivered in the fourth quarter, now in the first quarter. And we have been seeing very positive discussions for the past renewals and for upcoming renewals as well. As you have heard, clearly, discovery+ is an argument in those discussions, but it's one of many. And to me, it comes back to just the rational look at what the economics are. And we are delivering close to 20% of viewership for our affiliates. We're a great partner. We're leaning in with investments. This company is investing as much in content as never before this year. And we're doing that, and we're making that available to our affiliates at a very, very competitive rate. And so again, I don't want to make any predictions here on individual renewals, but those are constructive discussions, and we feel that we're in a very good position.

The only thing I would add to that is outside the U.S., we've been doing real partnership arrangements, whether it'd be Vodafone or Sky, where it's seen as a real positive. And the fact that Comcast is a great operator, he's launched us on Flex. We're now going to be launching on X1. So we really -- effectively, we have two sides of a terrific partnership. They're getting value in -- and we're talking to a number of other distributors that we'll be following on. But it's not cannibalistic at all with Comcast. They're able to create value for us and for them by -- and I think they have some real entitlement. They're a broadband leader. And these channel stores have really developed. And Comcast is looking. And between Flex and X1, it could be a real generator of value for both of us. And as Gunnar said, the share of our traditional channels are going up. They're selling those channels. The cost of those channels are very low, and we're probably the best actor in that space and that we're providing the core value of the bundle. And we have renewed some deals since we launched discovery+, and we've done very well.

And I just realized, forgot to answer part of the question. We're not giving a full year flat growth outlook here for all the known reasons. But what I did say a little earlier is the -- some color on the second quarter, and let me maybe elaborate on that. So again, we delivered 12% in Q1, and I expect an acceleration off of this number. I'm not getting more specific here because, to some extent, it is going to depend on the cadence of subscriber additions on the D2C side because, as I said, that's flowing through now very significantly on the revenue side. But if you keep in mind, last year in Q2, we had a very sizable one-off item. So that's going to work against us here. And when I say acceleration from the 12%, I mean, despite that one-off. So on an underlying basis, we'll see this may be -- this may be an underlying high single-digit growth quarter, which is going to come through as -- sorry, high teens, high-teens growth quarter, which is going to come through as an acceleration against the 12%.

Our next question comes from Doug Mitchelson with Crédit Suisse. Your line is open.

Kind of hard to fill in questions here. I think, David, first for you, how are you balancing content on Go versus discovery+, how are you -- and versus the linear networks? And any change in content strategy from what you've seen so far in terms of what people are consuming on discovery+? I think that's sort of number one. I think number two, upfront looks like up 15% to 20% for CPMs year-over-year. It's early. We've got a ways to go, but the setup looks very, very strong, any thoughts for Discovery and comments on that? And if I could tag on a quick one, ad load at four minutes. When does that start increasing? Or do you just leave it at four minutes because it's good or not?

Thanks, Doug. On the upfront, look, I don't know that I've seen 50% increases in CPMs of a prior year upfront before. The CPMs are very high. But what we really have an advantage of is that the broadcasters have been getting $60 plus, and we've been getting less than half that. And now all of a sudden, instead of companies, we're booking -- we're really making progress in booking significant dollars in the 40s, high 40s, even $50. And part of that has to do with the fact that our share is going up. We have some hit shows whether it'd be mail on Discovery or whether it be shows like, like 90 Day Fiance, which is number one show on television. And we've started to get paid a lot more money for that. And so I think you will see our CPMs, I think, meaningfully better because we have a lot of headroom still to drive our CPM versus competitors that have been at a very high level. So I think we hit this upfront at a very good moment. In addition, we have now some scale inventory on discovery+, which is selling very well. And in the -- in that environment, then on Go, we don't have the disadvantage of it's -- a viewer is a viewer. So we don't have that inherent disadvantage versus the broadcasters. So we're getting paid on every sub. And we also have a very good demographic, which is generating dramatically higher CPMs than we're seeing in traditional. So overall, I think the advertising market, very, very strong, upfront coming up, feeling good about it. In terms of balancing, the idea that we have viewing subs on discovery+ spending over three hours. And that we have the highest ratings and that our churn is extremely low is telling us a lot about the quality of this product. But what's really interesting is that the top shows, our top original shows and top shows from our channels are only generating about 10% of the viewership. We have a very long tail library about the size of Netflix, and people are spending a lot of time with it. And a lot of times -- so we don't have like the one -- we don't have the one-hit show or the one-hit movie. But I think as a result of that, we're seeing much lower churn than our peers. And usage, that is a lot more. And that's generating real economics for us on the advertising side, which has surprised us, the kind of economics that we're getting. We will continue to experiment with how we move IP around. We have a lot of originals now on discovery+, and we have more coming. And we'll be doing that globally in addition to the local content that we have outside the U.S. JB, maybe you could speak to the balance as we look outside the U.S. for discovery+.

I mean, look, we are continuing to, obviously, with all our great local content that we said it from the beginning, our power outside the U.S. is this combination of great local IP with with the universal stories that come from the U.S. pipeline. And so we're continuing to lean into that. We are seeing, obviously, a lot of that great content. People -- and the success we've had to date in the markets, knowing that, obviously, since we launched and started talking about discovery+'s success over the last few months, we've launched in no really new additional markets in the markets we already had. So all that is still to come and in the markets we already have with the growth we've seen, it's all been an exploitation of the content we are investing in, winnowing, in some cases, earlier on discovery+ and then getting a sort of second fund later on either a free-to-air or pay nets, and in some cases, obviously, some content exclusively on discovery+. And that combination of content mix is working extremely well for us. And it's one that we're continuing to look at the data and the response of the consumer and continue to modify and adjust as necessary. The only other thing I'd say, Dave, to the question also about the four minutes of advertising. We obviously market the service as 5. And so we came out with a lower ad load than even what we marketed. We're going to continue to stay at that level for now. But that actually, over time, when we think it's appropriate, which we don't have any plans to do that for the minute, but down the road, we obviously have some flexibility to move above the four minutes if we need.

And then, Doug, maybe if I can just add to that, it's an upside. But right now, I mean, the trends are so overwhelmingly positive. I mean we have so much opportunity without to fiddle with the consumer experience here, right? As we said, we're already tracking north of $10 ARPU for that headline product. And as you would imagine, there's been a positive trend over the course of the quarter as we have sort of fired up the subscriber base and attracted more advertisers into the product. So there's an underlying positive dynamic. But if you just take a step back here, why are we saw excited about this? Number one, we've ceased to just sell a commercial demo. It's a big difference between the linear TV and our digital platform here. We're selling every single eyeball on discovery+ and TV Everywhere for that matter. Number two is we've got a really level playing field here. That big gap between and cable CPMs that we've been discussing for seen for decades here just doesn't exist. It's premium online video, and we're getting full value for our product. Not only that, we have a highly engaged audience. You heard some of the stats that we mentioned that are probably top of the industry, very family-friendly content environment. Couple that with the fact that premium online video inventory is scarce in the first place because a lot of the viewership is happening on ad-free platforms, that drives super high demand and a hot market environment right now. The other thing that I want to make -- the other point I want to make here in terms of upside is we're still in the early innings from the perspective of our product offerings towards advertisers, right? We have just launched our Binge advertising product pause ads. We're working on more. And it's in a way, it's part of the prioritization exercise here to get all those features online, but there are a couple of great other ideas. So I do think that we will, without even playing with a number of minutes here, we will have a pretty positive run rate here for ARPU over the next couple of months.

Our next question comes from Kutgun Maral with RBC Capital Markets. Your line is open.

Two, if I could, first, on the international pay-TV ecosystem. One of your peers recently announced plans to shutter a number of its networks across parts of Asia to focus even more on, on your end, can you refresh us on what linear TV -- pay-TV subscriber trends you're seeing across your larger international markets? And ultimately, your comfort level in the sustainability of those trends compared to perhaps maybe more drastically pivoting towards streaming? And then I have a follow-up.

On the international question, in terms of pay-TV universe, we're continuing to see a kind of stable to up slightly universe across the world. We have seen -- which we've been seeing actually for years. It's not necessarily a new trend. Unlike the U.S., we have seen more of a churn down from some of the higher-end tiers, but less -- more of a cord shaving in a few markets less than -- much less of a cord cutting. And so universal-wise, we feel like it's -- to continue to be fairly stable. There are -- I mean again, it's hard to talk about the international markets in broad strokes. But there are select markets which are seeing obviously more challenges, Brazil has been one where we've seen more of subscriber decline as the middle class there has been hit harder over the last few years. But overall, the universe remains fairly stable. And the outlook for it, for us, continues to be that it will remain pretty stable with again, some pockets of different markets moving in different directions. But net-net, reasonable stability with some continued churn down from the higher, more broadly packaged tiers down to a slightly lower price tiers in some markets. And I think as it relates to the news about the shuttering of the Asian channels, look, I think we've obviously leaned in, not to say we have shut full portfolios of channels. But as we've talked to you before, selectively in markets where we think the long-term opportunity of what is possible with discovery+ and the ARPUs that Gunnar and David talked to where there's an advantage there we've leaned into that in select markets like we've talked to you about in Denmark and other places. And we'll continue to look at that. As discovery+ rolls out in more markets internationally, obviously, that opportunity will become more real, and it's something we'll evaluate on a case-by-case and a market-by-market basis.

But for us, the market feels, right now, very strong for us. We're growing both our ad revenue and affiliate revenue. Our ad revenue is growing dramatically, but it also gives us a relationship with every distributor. And what we're able to do is provide a value to the distributor in the bundle where, in many cases, pay-TV is only 20%, 30% penetrated. And then they're super with us on discovery+ and saying, let's reach the rest of the universe. So the markets tend to look very different. And so the idea of supporting us with discovery+ and on our traditional platform is something that just has a lot of symmetry outside the U.S., plus we have the ability to promote on our platforms. So -- and we have a massive library. So for us right now, having this -- generating a lot of free cash flow and growth in our traditional, maintaining and strengthening our existing relationships and they need -- they don't want the channel stores to take all the business. So they're coming to us and saying, discovery+ is terrific. That's good for us. It's good for you. How do we help, and that's, whether it's the mobile players or the broadband players. So for us, we think we can play. It's an advantage for us. We have 10 to 12 channels in each country, so the scale is bigger.

That's great. And if I could, for Gunnar maybe. I want to just maybe take a step back from the quarter and ask about the AOIBDA outlook over the next few years. Obviously, 2020 took a hit with COVID. And this year, we're seeing peak DTC investments as well as Olympics weighing on profitability. Looking ahead, though, the DTC losses ease, Olympics losses get better in 2022 and then in 2023. And of course, hopefully, through all this, we'll hopefully see a recovery in linear ad trends in revenue as well. And of course, not expecting specific guidance, but can you just help us think through any high-level puts and takes as we think about what seems like a very favorable setup?

Well, I think you've just done that. I think those are the right building blocks. And look, I mean, just giving me a little more color. As I said before, we have stayed away from giving you very specific guidance to breakeven, et cetera. I continue to be super, super happy with the metrics that we're seeing for d+. And as I said a minute ago, in December, we put out there this 20% margin bogey for sort of the d+ business at scale. That's looking incredibly conservative based on what we're seeing right now. I mean let me just sort of take a step back here. We got to pay numbers which are top of the industry. Churn rate, and again, I want to be careful here because it's so early days, but the cohort numbers are looking extremely compelling. And we're doing better on ARPU than we originally modeled. Take those three together that just leads to a customer lifetime value estimate right now. And I want to be specific, it's still an estimate, but it's significantly better than what we had in mind when we gave that number in December. At the same time, we're acquiring these subs at pretty efficient subscriber acquisition costs. In fact, a lot of the loss that we're looking at here for start-up investments in the quarter is essentially -- the vast majority of this is just marketing driven. And you would assume some efficiency as the product becomes -- grows in awareness as we start getting more word of mouth, et cetera, and as we're benefiting from the high retention that we're seeing in our subscriber base. So taking all that together, again, it's just too early just to start talking about sort of an updated margin profile for three, four, five years out, but we feel very, very good about it. And to point it out, breakeven. Again, as we said before, it's not a metric we manage towards. As long as I can acquire subscribers here with phenomenal lifetime values at a fraction of that effect of cost of that lifetime value, we'll do it. And we also stand by what we said earlier. I don't think anyone is going to have the margins that we will have in this business. And I think we're going to get there much -- get to breakeven or scaled margins much earlier than anyone else just because our fundamental underlying economics are not changing. We're getting the same value from the consumer, and we're getting the same leverage out of our content. We continue to be in super efficient verticals that we're super strong in and that we have 30 years of experience. And we continue to exploit our content across platforms and across the entire globe. And it's amazing to see how this model, again, it's early days, but how it's working. We're getting phenomenal cross-pollination between our TV Everywhere environment and discovery+. It's great. And we'll just have to -- that's why I decided to give a couple more KPIs so you can all sort of make up your minds and think about it. How does it compare to what you're hearing from others? What does the model look like? And we'll just keep giving you some transparency here and take it from there rather than giving you a long-term, five-year outlook or something.

Your next question comes from Alexia Quadrani with JPMorgan. Your line is open.

Can you just please elaborate a little bit more on the demo of the typical consumer and your discovery+? It sounds like you're skewing favorably to where the demo the advertisers are particularly excited about reaching. And I'm wondering if given your outside success in the AdLite option, if you're skewing your promotional activity more toward that option versus the ad-free? And then my second question is just really on the moderation of linear sub decline that we've seen, you've got such great insight into the industry. And I'm curious, I know you don't have a crystal ball, but I'm curious if you think what's really been driving it and how sustainable it is.

Sure. Thanks, Alexia. It's a lot younger, more than -- about 15 years younger. And it's also about half, about half of people that have cable and about half of people that don't have cable, and the advertisers are -- and also with the length of view is so high and the engagement is so high, we've been doing extremely well. To your point, we look at AdLite as kind of a breakout hit. Here we are trending right now well over $10. And as we get bigger, it's continuing to grow. And we have this strong demo. So we look at AdLite as something that as we look at ad-free versus AdLite, we've been talking to those customers at four minutes an hour. They seem very happy. They -- ad-free very happy, but we don't really see a difference and the ability to generate significant incremental economics off of the AdLite. So you'll see us pushing on AdLite. And when -- in the ad free, which was very inexpensive as we were going to be rolling it out outside the U.S. The ability to do an AdLite outside the U.S., JB and I, after seeing this data, immediately, two months ago, were wow. And so we've been pivoting because there could be upwards of 50% incremental revenue. And as we get to scale more than that by doing the AdLite and you have a very good customer experience, so which was a surprise to us. We really thought people are used to commercials, they're not going to want any. But it's one of the reasons we're not going to 5. They're so happy with the 4. And we're getting such a premium for it. And it's working so well. We're just going to ride it.

And Alexia, maybe on your other question, the moderation of sub losses and linear, I wouldn't want to comment on the overall industry trend. Just keep in mind, our better number here is very much a Discovery-specific result. It's just we're getting additional carriage in some of the renewals of last year, and that's helped us. And we obviously continue to be among the best distributors across the virtual MVPD space. So that's been -- those two have been the helpers.

And for most of our core services, for all of our core services, we have very protected carriage as well. So the ability to, one, I don't think they would want to do anything to us, but we have very protected carriage in terms of being on the tiers and not being able to be move around at all. So you should continue to see us by the very nature of our agreements be at the very top. And the fact that they could add our channels to tiers to drive viewership, which we've seen in some of our newer deals, that we might -- will probably do better.

Your next question comes from Rich Greenfield with Lightshed Partners. Your line is open.

David, I think that partner plus users are spending three hours per day. That would be -- yes, can you hear me?

Yes, now we can. Yes.

Sorry. I don't know what happened.

So David, I think you said before a couple of times that time spent per discovery+ users, like three hours plus per day, that would be like 50% higher than Netflix and I think maybe 15x higher than Peacock daily usage. Just want to make sure, is that across I mean -- is that looking at 15 million subscribers and saying they're averaging three hours per day? Or is that some subset of the 15 million? And then I have a follow-up on ad sales. I think when you were talking about, at least in the release, you were talking about how sort of the reach of the pay-TV universe had an impact on ad sales. Could you just maybe explain what's happening in terms of -- is the shrinking pay-TV universe pushing more toward things like discovery+ and digital? What exactly was the reason in that comment? And how do you think that comment plays out over the coming 12 to 24 months?

Okay. Thank you, Rich. Let me clarify that. The three hours per day are per viewing sub, so not per average sub. And you can assume that we have about close to 50% active subscriber base on a daily basis. So that's how you need to interpret that number. Again, I think you're right, though, it's a great statistic across the ecosystem, and we're super excited about it. The point about the universe shrinking, it's just -- I mean, as I laid out, we gained share and, by the way, both domestically and internationally across the first quarter. And the viewing trends, though, for the entire pay-TV ecosystem in the first quarter just have been tough, I mean we've seen universe estimate declines and people using television.

The thing is that we were up significantly during the pandemic. And we were able to produce content. And we were really able to grow share pretty significantly everywhere in the world. Some of our channels like TLC and discovery+ and HGTV, they don't have the same cycle that scripted does. But we weren't able to produce a lot of content for those. We're now back to about 90% or 95%. And you'll be seeing more of our fresh content coming in. So one, I think, on a CAGR basis, we look different than everybody because we were up meaningfully during this period. But two, we're going to have more content because it took us a little while with some of the Fixer Uppers that we could -- that we were -- we had some of the impact of the pandemic. But we're no 90-plus back, and you'll see more fresh content. And I think we'll continue to gain share and outperform.

And David, just because as a kind of a big-picture question for you, as you think about where to put content, you're producing lots of it, and you said you're now back to like full capacity. How do you and the team decide, what goes digital first to discovery+ versus what goes to the linear networks? And how are you making those decisions? And is it changing already?

Look, we're learning a lot. We had a ton of originals. And we could see what's working, what kind of content people are watching. We have -- it's pretty fluid. We have higher production values. We've spent a little bit more star power on discovery+. We're trying to figure out what is the plus. Fixer upper, we didn't -- and Chip and Joe, we haven't put anywhere except for discovery+. That was a big helper to us. The BBC content will only be on discovery+, which we're experimenting with. We put a 90-day series on that only went on discovery+, and it drove a lot of subscribers and a lot of viewership. And then those viewers are watching our whole 90-day library with over 150 hours of original on there. So we're trying to -- and then at some point, that we put that back on some of that content back, that's what we're trying to figure out right now. But we've been able to feed the growth. As Gunnar said, we're seeing some steady and strong growth on discovery+. And we're really focused on growing internationally where JV is taking it out. And internationally, it's a little bit of a different story because we're local in sport. But JB, why don't you talk a little bit about the international piece of that balance?

Yes. I think, Rich, the other thing that's unique, and as David and Gunnar talked about before, is the cost efficiency of our model for most of our production makes it such that we don't have as much as the either/or. You got a window here or you go only window here. And so the exclusivity that you exist in scripted, which, for the price tag, you can only do one or the other. I think we have a very balanced and smart approach, which is we are -- for franchises and talent that are known to our linear brands, we continue to make sure that we're nurturing those audiences. And selectively, and particularly, as David said, we're experimenting in different ways to try and see what the data tells us. We're experimenting with some early windows or pulling -- having a talent that's been doing stuff on linear do some additional stuff for us on D2C. But it's -- we can do a little bit of both. It's continue to produce great originals and stories for our traditional and give people an ability to want to access that and embark subscribing to it in the bigger bundles, access to it on d+, either concurrently or even a bit later in some cases. And at the same time, invest in some originals for discovery+ that are unique, new IP, new faces, new talent, new stories, edgier stories, in some cases, what we could do on linear traditionally and without breaking the bank on content budgets. And so it's a really -- it's another strength of our unique content model that doesn't make it such an either/or, and we're continuing to experiment with some of the windows and see what the data tells us.

The only point I would add is the reason I talked about in my comments about Italy is 80% of that country all of our content is new to them. So as you look across Europe and Latin America, even though we have a very successful pay business, that we have a huge library having been in these markets locally for 15, 20 years, that we could now go to an offering at a very low price and be available to 80% of the country that didn't have access to us before. So here, how do we window it and how do we move it back and forth is a very different question when you're going into a country that's 20% or 30% penetration. And it's now new to the overwhelming majority of the population. They've heard of it. They've heard of it. They have good feeling about it. But maybe they couldn't afford to buy it or they want it on a different device, but it's a different calculation.

But David, it's also it's most extreme in some of those international territories. But to some extent, we see the same here domestically. As we laid out, we're up for the first time, we're now targeting 30 million homes that don't have a cable subscription. We're getting a significant number of additional viewers in here that are generating revenue at the same or a better ARPU. And that allows us to invest behind us. And that investment over a couple of months or next year maybe is going to raise all boats because we're just creating more of what we're best at, which is our, our global unencumbered, 100%-owned and high-quality IP.

And your next question comes from Brandon Nispel with Keybank. Your line is open.

Gunnar, I was hoping you could talk more about the retention currents that you're seeing thus far for the cohort of customers. Are you seeing retention after the first month of greater -- less than 90%? Maybe just some more color there would be helpful.

Yes. Look, as I said before, we are very, very encouraged by those retention curves. We are seeing more than 90% of retention. We're starting one step earlier, very, very strong role to pay of north of 80% after the seveb-day free trial, talking U.S. here. And then greater than 90% retention in the first month and then a very, very significant drop-off in sort of cohort churn, so again, it's way too early to talk about sort of a stable long-term churn rate here, but the numbers are off the charts compared with what we expected. And also, frankly, based on the intel that we have been able to pull together here, I think they're also stacking up very, very nicely against competitive offerings. Again, it's early days. I always want to disclaim that, but we could not be happier. And I think it makes sense. If you look at the length of tune that we've always been seeing with our viewership in linear as well, we're essentially seeing the same behaviors here in the DC world.

Then on long-term churn expectations, where do you think you fall? You said low single digit. But is that 2% to 3%? Or is that more of a 4% number?

Well, look, let's -- as I said, it would be speculation right now. I think we're going to do very, very well compared with even the leading players in the industry.

It's tough for us to take one month or two months but three months and say this is where it's going to be forever. The numbers are very good, and we are in the low single. And we'll see over the next -- even if we think it's trending down, if we think that, that may change over the next couple of months, for the good of the bed. But right now, the -- by every measure, the churn is significantly lower than we expected. And it's one of the reasons why we're leaning into it, not just the length of view, but the very low churn and how happy people seem to be with the product.

And I mean again, what we're looking at right now is really that estimating customer lifetime value, up very, very significantly compared with what we put in our initial business case. That was the foundation of what presented in December and how that relates to subscriber acquisition costs. And clearly, if we're looking at our numbers here, I have to wring out a lot of marketing spend in the first quarter. And I was very, very happy to do it because we're just looking at even the revenue contributions over the balance of the year. It's just an amazing return on investment by any measure.

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

Gunnar, I was wondering if you could talk a little bit about how you guys think about the D2C business in the context of the overall business, in other words, do you think about this as a single P&L? Because it's very tempting on our side to here sort of the $1 billion drag on EBITDA. And the path to breakeven is suggesting some pretty substantial EBITDA growth for the Company over the next several years. And I'm wondering if you can talk a little bit about how you think about managing the business, particularly on the content and marketing front, so our expectations are sort of in the right place, if that makes sense?

I mean the question is spot on, Ben, because I mean we are -- frankly, the matter is we're looking at 2, at least, revenue streams here now that have fundamentally different financial profile. So the idea would be indeed tempting to say, okay, we have a digital business and a linear business. This is not the reality right now and maybe less so for us than for others just because we have that amazing IP exploitation model. One of the big advantages that we have is our ability to take so many bites at the apple across the global footprint and across platform. So that's why, right now, it is a little hard to really cleanly split out a digital P&L and a linear P&L. And frankly, it's also not entirely in line with how we manage the Company because JV and his team are very much looking at international markets in an aggregate basis. And some of the trade-off decisions that we've laid out are very much focusing on trading off linear and digital. That being said, we will try to make it as easy as possible for you guys to form a view. And look, by laying out the metrics here for our discovery+ product, by giving you a perspective on losses that we have incurred from launching and by giving you at least a short-term outlook about how we expect those loss to be trending, we're trying to help you model this. And as I said earlier, I would assume those losses to start-up start tapering a little bit in the second quarter. Again, I also want to have the flexibility to lean in further, if we find other markets are coming online that have a great opportunity to acquire subs at a multiple of their acquisition cost. So we'll need some wiggle room here, but I'm trying to sort of give you an understanding of that financial profile. As I said, I mean, I am focused on long-term sustainable growth for this company. I think that's what's going to drive shareholder value. And I mean if you just look at, if you just look at our guidance here for the second quarter, accelerating U.S. distribution revenues from 12% against the tough comp, double-digit U.S. ad sales growth, 50% international ad sales growth and significant acceleration in international distribution growth to mid-single digits. I think, again, it's early days, but I would say it's working.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.