Warner Bros. Discovery, the media conglomerate formed through a merger between Warner Bros. and Discovery, recently released its fourth-quarter earnings report. While the report showcased impressive free cash flow and progress in reducing the company’s heavy debt load, it failed to prevent a 10% decline in the company’s share price. Investors were taken aback by the significant year-over-year declines in revenue and earnings at WB Discovery’s studio and linear networks divisions, which are the company’s main sources of profit.
The decline in earnings and revenue can be attributed to the strikes by actors and writers unions that occurred during the October-December period. These strikes resulted in the loss of seven months of production and development activity for the Warner Bros. studio. The decline in adjusted earnings for the studio was 30%, while revenue dropped by 9%. This unexpected decline in performance was reflected in the cautious tone adopted by David Zaslav, CEO of WB Discovery, during the earnings call. He acknowledged the challenges faced by the company due to ongoing disruption in the pay TV ecosystem and a dislocated linear advertising ecosystem.
Despite the disappointing performance of the studio and linear networks, there were some positive highlights in the earnings report. Warner Bros. Discovery’s streaming platform, Max, narrowed its overall loss significantly, and the company generated $6.2 billion in free cash flow throughout 2023. Additionally, WB Discovery managed to make $5.4 billion in debt payments last year, reducing its long-term debt from $48 billion at the end of 2022 to $42 billion at the end of 2023. The company’s chief financial officer, Gunnar Wiedenfels, assured analysts that they have a manageable amount of debt coming due in the next three years, providing flexibility for deleveraging.
However, despite these positive aspects, concerns remain about the underperformance of Warner Bros. studio and the challenges faced by Max in the streaming arena. The company, along with other media giants like Disney, Comcast, and Paramount Global, is struggling to generate profits from their direct-to-consumer ambitions. To address this issue, WB Discovery is considering a return to bundling, moving away from the “direct” and “consumer” parts of the equation. The company recently announced a TV sports venture with Disney and Fox Corp, aiming to offer a streaming package that includes ESPN, Fox Sports, TNT, and TBS.
David Zaslav emphasized the importance of bundling to simplify the pay TV programming landscape and meet the strong demand from consumers. However, given the lackluster growth rate of HBO Max subscribers compared to competitors like Netflix, there are doubts about the effectiveness of this strategy. Warner Bros. Discovery is also banking on international growth to improve the fortunes of Max. The company plans to launch Max as a standalone offering in Latin America, France, and Belgium, with dedicated streaming platforms expected to be launched in the UK, Germany, and Italy by 2026.
Despite the challenges faced by WB Discovery, Zaslav remains optimistic about the future. He highlighted the upcoming content lineup for both the studio and Max, including highly anticipated titles like the “Joker” movie sequel and the TV series spin on “Harry Potter.” Zaslav believes that these franchises and shows will contribute to the company’s growth over the next two years.
In conclusion, Warner Bros. Discovery’s fourth-quarter earnings report disappointed investors, leading to a decline in the company’s share price. The decline in revenue and earnings at the studio and linear networks divisions was unexpected and attributed to strikes by actors and writers unions. However, there were positive aspects in the report, such as the narrowing loss of Max and the significant free cash flow generated by the company. WB Discovery is facing challenges in the streaming arena but is considering a return to bundling to address these issues. The company is also focusing on international growth and has an optimistic outlook for its upcoming content lineup.
