Gunnar Wiedenfels
Chief Financial Officer at Warner Bros. Discovery
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.
