Management's discussion and analysis of financial condition and results of
operations is a supplement to and should be read in conjunction with the
accompanying consolidated financial statements and related notes. This section
provides additional information regarding our businesses, current developments,
results of operations, cash flows and financial condition. Additional context
can also be found in our 2021 Annual Report on Form 10-K.
BUSINESS OVERVIEW
On April 8, 2022, Discovery, Inc. ("Discovery"), a global media company that
provides content across multiple distribution platforms including linear,
free-to-air and broadcast television, authenticated GO applications, digital
distribution arrangements, content licensing arrangements and direct-to-consumer
("DTC") subscription products (the "Discovery Business"), completed its merger
(the "Merger") with the WarnerMedia business of AT&T, Inc. ("the WarnerMedia
Business") and changed its name from "Discovery, Inc." to "Warner Bros.
Discovery, Inc." On April 11, 2022, the Company's shares started trading on the
Nasdaq Global Select Market under the trading symbol WBD.
Warner Bros. Discovery is a leading global media and entertainment company that
creates and distributes the world's most differentiated and complete portfolio
of content and brands across television, film and streaming. Available in more
than 220 countries and territories and 50 languages, Warner Bros. Discovery
inspires, informs and entertains audiences worldwide through its iconic brands
and products including: Discovery Channel, discovery+, CNN, DC, Eurosport, HBO,
HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia
Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science
Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New
Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en
Español, Hogar de HGTV and others.
In this Quarterly Report on Form 10-Q, unless the context indicates otherwise,
references to "Warner Bros. Discovery," "the Company," "we," "us," or "our"
refer to Discovery, Inc. as a standalone company prior to April 8, 2022, the
date we completed the Merger with the WarnerMedia Business, and on and after
April 8, 2022 refer to the combined company as a result of the Merger.
In 2021, we launched discovery+, our aggregated DTC product, in the U.S. across
several streaming platforms and entered into a partnership with Verizon. Since
launch, discovery+ has expanded internationally including in the U.K., Canada,
the Philippines, Brazil, Italy, and India. As of March 31, 2022, we had
24 million total paid DTC subscribers.1 discovery+ currently has an extensive
content library including original series and documentaries. The service is
available with ads or on an ad-free tier, providing us with dual revenue
streams.
Although we utilize certain brands and content globally, as of March 31, 2022,
we classified our operations in two reportable segments: U.S. Networks,
consisting principally of domestic television networks and digital content
services, and International Networks, consisting primarily of international
television networks and digital content services. Our segment presentation
aligned with our management structure and the financial information management
uses to make decisions about operating matters, such as the allocation of
resources and business performance assessments. We expect to reevaluate our
segment presentation and reportable segments following the Merger during the
quarter ending June 30, 2022.
During the three months ended March 31, 2022, we exited our operations in Russia
and removed all of our channels and services from the market. We do not expect
these actions will have a material effect on our consolidated financial
statements.
Merger with the WarnerMedia Business of AT&T
On April 8, 2022, the Company completed its Merger with the WarnerMedia Business
of AT&T, Inc. The Merger was executed through a Reverse Morris Trust type
transaction, under which the WarnerMedia Business was distributed to AT&T's
shareholders via a pro rata distribution, and immediately thereafter, combined
with Discovery. In connection with the Merger, AT&T received $40.5 billion
(subject to working capital and other adjustments) in a combination of cash,
debt securities, and WarnerMedia's retention of certain debt, and Discovery
transferred purchase consideration of $42.4 billion in equity to AT&T
shareholders. AT&T shareholders received WBD stock in the distribution
representing 71% of the combined company and the Company's shareholders will
continue to own 29% of the combined company, in each case on a fully diluted
basis.
1 We define a DTC subscription as (i) a subscription to a direct-to-consumer
product for which we have recognized subscription revenue from a
direct-to-consumer platform; (ii) a subscription received through wholesale
arrangements for which we receive a fee for the distribution of our
direct-to-consumer platforms, as well as subscriptions provided directly or
through third-party platforms; and (iii) a subscription recognized by certain
joint venture partners and affiliated parties. We may refer to the aggregate
number of subscriptions across our direct-to-consumer services as subscribers. A
subscription is only counted if it is on a paying status, and excludes users on
free trials. At the end of each quarter, the subscription count includes the
actual number of users that rolled to pay up to seven days immediately following
quarter end. Our quarterly subscriber count continues to include Ukraine
subscribers to discovery+ who are temporarily receiving the service for free,
the total of which is not material. .
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Immediately prior to the consummation of the Merger, each issued and outstanding
share of Discovery Series A common stock, Discovery Series B common stock, and
Discovery Series C common stock, was reclassified and automatically converted
into one share of WBD common stock, and each issued and outstanding share of
Discovery Series C-1 preferred stock was reclassified and automatically
converted into 19.3648 shares of WBD common stock. For earnings per share
purposes, all share and per share amounts of the aforesaid share classes have
been retroactively adjusted for all periods presented to give effect to this
reclassification and conversion. Additionally, each issued and outstanding share
of Discovery Series A-1 preferred stock was reclassified and automatically
converted into 13.1135 shares of WBD common stock. Discovery Series A-1
preferred stock and earnings per share data has not been recast because the
conversion to WBD common stock in connection with the Merger was considered a
discrete event and treated prospectively. Other than earnings per share
presentation, the reclassification and conversion of all share classes to WBD
common stock will be adjusted in the period the transaction took place.
Discovery was deemed to be the accounting acquirer of the WarnerMedia Business
for accounting purposes under U.S. GAAP. In identifying Discovery as the
accounting acquirer, Discovery's conclusion was based primarily upon the
following facts: (1) Discovery initiated the Merger, was the legal acquirer of
Magallanes, Inc., ("Spinco"), and transferred equity consideration to Spinco
stockholders, (2) AT&T received $40.5 billion of consideration as part of its
disposition of the WarnerMedia Business, (3) the current Chief Executive Officer
of Discovery will continue as Chief Executive Officer of WBD for a substantial
period of time after the Merger and was primarily responsible for appointing the
rest of the executive management team of WBD, and the current Chief Financial
Officer of Discovery will serve as Chief Financial Officer of WBD, (4) no
stockholder or group of stockholders will hold a controlling interest in WBD
after the completion of the Merger and a key Discovery stockholder has the
largest minority interest in WBD, and (5) AT&T has no input on the strategic
direction and management of WBD after the completion of the Merger. The above
facts were deemed to outweigh the fact that the holders of shares of Spinco
common stock that received shares of WBD common stock in the Merger in the
aggregate own a majority of WBD common stock on a fully diluted basis and
associated voting rights after the Merger.
As the accounting acquirer, Discovery is considered WBD's predecessor and the
historical financial statements of Discovery prior to April 8, 2022, are
reflected in this Quarterly Report on Form 10-Q as WBD's historical financial
statements. Accordingly, the financial results of WBD as of and for any periods
prior to April 8, 2022 do not include the financial results of the WarnerMedia
Business and future results will not be comparable to historical results.
The Merger required the consent of Advance/Newhouse Programming Partnership
under the Company's certificate of incorporation as the sole holder of the
Series A-1 Preferred Stock. In connection with Advance/Newhouse Programming
Partnership's entry into the consent agreement and related forfeiture of the
significant rights attached to the Series A-1 Preferred Stock in the
reclassification of the shares of Series A-1 Preferred Stock into common stock,
it received an increase to the number of shares of common stock of the Company
into which the Series A-1 Preferred Stock converted. The impact of the issuance
of such additional shares of common stock was $789 million and was recorded as a
transaction expense upon the closing of the Merger.
Discovery and WarnerMedia employee share-based awards, issued and outstanding
immediately prior to the Merger, were converted into equity-based awards on
comparable terms and conditions with respect to shares of WBD stock. 70% of
Chief Executive Officer David M. Zaslav's unvested stock options vested upon
closing of the Merger according to the terms of his amended and restated
employment agreement. The remaining 30% of such options will remain outstanding
and continue to vest as provided by the prior employment agreement.
In anticipation of the Merger, Magallanes, Inc., a wholly owned subsidiary of
AT&T Inc., entered into a $10 billion term loan (the "Term Loan") and issued
$30 billion aggregate principal amount of senior unsecured notes. The proceeds
were used to fund the cash payments to AT&T and to otherwise fund the
transaction and pay fees and expenses. Upon completion of the Merger, AT&T was
released from all obligations and the debt was unconditionally guaranteed on a
senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD
that is a borrower or considered a subsidiary guarantor under the Term Loan or
the Credit Facility, and will rank equally with all of the Company's other
unsecured senior debt.
Due to the limited time between the transaction date and the Company's filing of
this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, initial
accounting for the business combination is incomplete and the Company is not yet
able to disclose the provisional amounts to be recognized as of the acquisition
date for assets acquired and liabilities assumed. The Company expects to provide
preliminary purchase price allocation information in the Quarterly Report on
Form 10-Q for the quarter ending June 30, 2022.
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Impact of COVID-19
We continue to closely monitor the ongoing impact of COVID-19 on all aspects of
our business and geographies, including the impact on our customers, employees,
suppliers, vendors, distribution and advertising partners, production
facilities, and various other third parties. Certain key sources of revenue for
the WarnerMedia Business, including theatrical revenues, television production,
studio operations and themed entertainment, have been adversely impacted by
governmentally imposed shutdowns and related labor interruptions and constraints
on consumer activity, particularly in the context of public entertainment
venues, such as cinemas and theme parks.
The nature and full extent of COVID-19's effects on our operations and results
is not yet known and will depend on future developments, which are highly
uncertain and cannot be predicted, including new information that may emerge
concerning the severity and the extent of future surges of COVID-19, vaccine
distribution and other actions to contain the virus or treat its impact, among
others. Our consolidated financial statements reflect management's estimates and
assumptions that affect the reported amounts of assets and liabilities and
related disclosures as of the date of the consolidated financial statements and
reported amounts of revenue and expenses during the reporting periods presented.
Actual results may differ significantly from these estimates and assumptions.
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RESULTS OF OPERATIONS
Except as expressly stated, the financial condition and results of operations
discussed throughout Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Quarterly Report on Form 10-Q are
those of Warner Bros. Discovery, Inc. and its consolidated subsidiaries prior to
the Merger.
Foreign Exchange Impacting Comparability
The impact of exchange rates on our business is an important factor in
understanding period-to-period comparisons of our results. For example, our
international revenues are favorably impacted as the U.S. dollar weakens
relative to other foreign currencies, and unfavorably impacted as the U.S.
dollar strengthens relative to other foreign currencies. We believe the
presentation of results on a constant currency basis ("ex-FX"), in addition to
results reported in accordance with U.S. GAAP provides useful information about
our operating performance because the presentation ex-FX excludes the effects of
foreign currency volatility and highlights our core operating results. The
presentation of results on a constant currency basis should be considered in
addition to, but not a substitute for, measures of financial performance
reported in accordance with U.S. GAAP.
The ex-FX change represents the percentage change on a period-over-period basis
adjusted for foreign currency impacts. The ex-FX change is calculated as the
difference between the current year amounts translated at a baseline rate, which
is a spot rate for each of our currencies determined early in the fiscal year as
part of our forecasting process (the "2022 Baseline Rate"), and the prior year
amounts translated at the same 2022 Baseline Rate. In addition, consistent with
the assumption of a constant currency environment, our ex-FX results exclude the
impact of our foreign currency hedging activities, as well as realized and
unrealized foreign currency transaction gains and losses. Results on a constant
currency basis, as we present them, may not be comparable to similarly titled
measures used by other companies.
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WARNER BROS. DISCOVERY, INC. 
