Warner Bros. Discovery ended March with 97.6 million global streaming subscribers, compared with around 96.1 million as of the end of 2022 and ahead of estimates, the entertainment conglomerate disclosed in its first-quarter earnings report on Friday. Importantly, its streaming unit swung to a $50 million profit, compared with a loss of $654 million in the year-ago period and a $217 million loss in the fourth quarter. Wall Street will take note of that streaming success as a sign of continued progress toward management’s vow to make the business sustainably profitable and of delivering on its promise to not chase subscribers at all costs.
“We feel great about the trajectory we are on,” said Warner Bros. Discovery CEO David Zaslav about becoming the first Hollywood giant to post a profitable quarter for its streaming division since entertainment CEOs set their sights on getting their direct-to-consumer operations to making a profit. He spoke of “a meaningful turn,” adding: “In fact, we now expect our U.S. direct-to-consumer business to be profitable for 2023 – a year ahead of our guidance.”
Wells Fargo analyst Steven Cahall had in his earnings preview forecast a streaming loss of $76 million, “though we expect losses to step up to $344 million in the second quarter on higher selling, general and administrative (expenses) associated with the Max relaunch.”
Warner Bros. Discovery on Friday reported quarterly revenue of $10.7 billion, down 6 percent and roughly in line with analysts’ expectations, while the bottom line fell below estimates. The company’s first-quarter loss of 44 cents per share compared with a Wall Street consensus for a loss of 5 cents a share and marked a swing from the year-ago profit of 69 cents per share. However, stripping out expenses related to the merger of Discovery and AT&T’s WarnerMedia, which created the sector powerhouse, the company would have beaten consensus earnings estimates.
The company’s quarterly loss of $1.07 billion included $1.81 billion in “pre-tax amortization from acquisition-related intangible assets and $95 million of pre-tax restructuring expenses,” the company said.
Growing free cash flow, a profitability metric that shows how much money a company has left over after meeting its financial obligations, has been a key focus of Zaslav’s team. However, for the first quarter, Warner Bros. Discovery on Friday reported negative free cash flow of $930 million due to interest and sports rights payments.
WBD’s stock was down more than 4 percent in pre-market trading at 8:30 a.m. ET.
The mega-deal that created the company closed a little more than a year ago, in April 2022. “We’ve come through some major restructurings and have repositioned our businesses with greater precision and focus,” Zaslav said on Friday. “And we see a number of positive proof points emerging, with direct-to-consumer perhaps the most prominent.”
During an earnings conference call on Friday, Zaslav added: “We have turned the corner on our streaming business. We had a different view of it.” He continued: “Our U.S. streaming business is no longer a bleeder. It is hard to run a business when you have a big bleeder.”
Management also reiterated on the call that the firm’s international streaming business will turn profitable later given it is less mature and faces spending for new market launches.
Various Wall Street analysts have turned bullish on Warner Bros. Discovery this year amid management’s focus on free cash flow, debt reduction and streaming profitability.
The company unveiled in mid-April that it would combine its HBO Max and Discovery+ streaming services into the rebranded Max, set to launch in the U.S. on May 23. Its goal is to make Max the streaming destination for everyone in a household, with the new tagline “The One to Watch.” Max will offer the company’s library product and new intellectual property, but also double down on beloved franchises with the likes of a live-action Harry Potter scripted television series and new installments of The Big Bang Theory and Game of Thrones.
Streaming revenue for the first quarter hit $2.46 billion, down 1 percent excluding foreign-exchange impacts “as global retail subscriber gains were more than offset by a decline in wholesale revenues,” while advertising revenue jumped 29 percent, “primarily driven by subscriber growth on our direct-to-consumer (DTC) ad-supported tiers,” the company said. Content revenue dropped 16 percent, driven by lower third-party licensing of HBO content. Streaming unit operating expenses declined 24 percent to $2.41 billion due to lower content amortization, the shutdown of CNN+ and “more efficient marketing spend,” the firm said.
Studios unit adjusted earnings before interest, depreciation and amortization (EBITDA) declined to $607 million in the first quarter, down 23 percent excluding foreign-exchange impacts, driven by lower revenue. Studios revenue of $3.21 billion decreased 7 percent due to “lower TV licensing, theatrical film rental and, to a lesser extent, home entertainment revenues,” the company said. “TV licensing declined primarily due to certain large TV licensing deals in the prior-year quarter, as well as fewer theatrical
availabilities. Theatrical film rental was lower due to the strong performance of The Batman in the prior- year quarter.” However, “other revenue” increased 30 percent due to higher studio production services and “continued strong attendance at Warner Bros. Studio Tours in London and Hollywood.” Plus, the first-quarter launch of Hogwarts Legacy was the largest release of all time for Warner Bros. Games, making it the firm’s “best-selling game year-to-date with over $1 billion in retail sales.”
WBD’s Networks unit posted first-quarter EBITDA of $2.29 billion, down 10 percent excluding foreign-exchange factors as revenue fell 10 percent to $5.58 billion, while operating expenses dropped 10 percent due to such factors as costs related to the 2022 Olympics in the prior-year period and “lower
domestic general entertainment content expense, partially offset by higher domestic sports rights and costs associated with the unconsolidated BT Sport joint venture” in the U.K. and Ireland. Revenue dropped due to a 3 percent distribution revenue decline, “primarily driven by increases in U.S. contractual affiliate rates, which were more than offset by declines in U.S. pay-TV subscribers.”
Advertising revenue decreased 14 percent, “primarily driven by audience declines in domestic general entertainment and news networks and soft advertising markets mainly in the U.S. and, to a lesser extent, certain international markets.”
The company also noted that the broadcast of the 2022 Winter Olympic Games in Europe negatively impacted the year-over-year growth rate in the latest quarter, “partially offset by higher domestic sports advertising driven by the NCAA March Madness tournament.”
On an earnings conference call on Friday, Zaslav said that WBD is “actively working” on adding sports and news offerings to Max over time, saying such live programming can “keep consumers coming back for more and staying longer.” He later also touted that Max will give his team a chance to reduce subscriber churn.
Discussing Warner Bros., Zaslav touted its 100th anniversary this year and emphasized that “this studio has historically been the crown jewel of the industry, and we are working hard to rebuild it to its former glory.” He touted “meaningful creative momentum, with more and more of the most talented storytellers in the business choosing to partner with us.”
“After a very challenging year at the box office,” Zaslav touted such upcoming movie releases as Dune: Part Two, Barbie, Blue Beetle and The Flash. And he said that “we are committed not just to expanding the size of our film slate next year, but even more importantly, we are committed to making great, high-quality films that have an impact.” He reiterated his past comment that “it’s not about how much, it’s about how good.”
Warner Bros. had “two of the worst years,” but management is bullish on the studio’s rebuilding, Zaslav said later on the call. “We got James Gunn and Peter (Safran) working very hard on DC, which is going to be a very big growth driver for this company. We are very bullish on DC. The Superman script first draft is done. Gunn is on a mission from god. It is a really good moment to prove out on DC what we got and how strong it is globally for long-term sustainable growth.”
Continued the WBD CEO: “We got some more movies that are better; we have been working hard on fixing them and enhancing them and investing. We said no movie before its time. And with Barbie and Flash we have two very good movies. I think the slate coming up now will make a big difference. We have lost a lot of money in the motion picture business, and making that turn is important.”
Zaslav also said his team is focused on “reinvigorating our feature animation business,” mentioning the recent hiring of former DreamWorks Animation top executive Bill Damaschke who is “hard at work (with the studio leadership) developing a new slate.”
Discussing WBD’s international streaming strategy, he said the company is expecting to run or launch its own streaming services “in most markets,” but will license its content in markets where it doesn’t expect a near-term profit from its own streamers, such as India. He added though that at the end of such licensing deals, the company would look at whether it then has a better chance of running its own profitable streaming service.
WBD CFO Gunnar Wiedenfels joked on Friday’s call that a year into the mega-merger it “candidly feels more like three” years in, but touted that the management team was “still in the early innings of “unlocking the full potential” of the combined company.
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