Hollywood Writers’ Strike Looms Over Warner Bros. Discovery Earnings | Analysis
Money first, product later: David Zaslav and the rest of Warner Bros. Discovery’s leadership team will address Wall Street on Friday as the company is preparing to launch its controversial Max rebrand on May 23. Analysts are already impatient to see if the megadeal Zaslav architected is paying off as it reports first-quarter earnings.
“It’s been over a year since the Warner Bros. Discovery merger and the big question is whether the combined company is starting to fire on all cylinders,” Third Bridge analyst Jamie Lumley told TheWrap. “After a tumultuous 2022, Warner Bros. Discovery is anxious to see results from its cost-cutting measures and build some momentum as it launches Max later this month.”
That momentum just hit a speed bump: The Writers Guild of America is on strike, with some picketers naming Zaslav on their signs and the union calling out his compensation package along with other studio heads. The writers’ demands include a long list of concerns, from the low pay involved in writing streaming series, to the use of “mini-rooms” to skirt contractual pay practices and the prospective use of artificial intelligence in generating scripts.
“Everybody needs to feel fully valued from start to finish,” Zaslav said during an April press conference on the Warner Bros. lot when asked about the then-looming labor conflict. He’s repeatedly extolled the importance of storytelling to the company and even gave the newly formed Warner Bros. Discovery the tagline “the stuff that dreams are made of,” a nod to a line from the 1941 film “The Maltese Falcon” written by screenwriter John Huston.
“I think our objective, that everybody gets fairly compensated for the work that they do,” he added. “We’re optimistic that we can get through this in a way that’s fair to all parties involved.”
But he also emphasized that the company had a lot of content lined up in preparation for the strike and were “ready to to go guns blazing in terms of our product and our platforms around the world.”
Warner Bros. Discovery will be among the companies who have an easier time with the transition caused by the strike, analysts at MoffettNathanson wrote in a Wednesday note to clients, citing the company’s “outsized emphasis on sports and unscripted content.”
However, Lumley argued there is “significant uncertainty around the company’s content strategy,” citing the “ongoing debate” at the company over scripted programming, where the Warner part of the company was strong, and unscripted programming – Discovery’s forte.
“While scripted shows such as ‘Succession’ and ‘Game of Thrones’ have been very successful for HBO Max, David Zaslav seems to prefer the kinds of reality shows that Discovery+ has generated in large quantities that are relatively cheap to produce,” Lumley added.
Given the WGA strike’s impact on programming like HBO’s “Last Week Tonight With John Oliver,” Lumley said there’s “certainly a chance that the company will address its longer-term impact” on Friday when it hosts a call with analysts to discuss its results. “There is potential for challenges down the road,” even with scripted content, if the strike lasts as long as the 2007-2008 walkout did, he added.
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The state of the linear TV business — declining but still profitable — and the growth in streaming subscribers even before the Max rebrand will be closely scrutinized by Wall Street.
“Competing in streaming is an expensive endeavor and Warner Bros. Discovery needs all the resources it can get if it wants to stay in the game against industry leaders Netflix and Disney,” Lumley said.
Warner Bros. Discovery’s stock would likely benefit from the strike, given investor focus on the company’s balance sheet, LightShed Partners analyst Rich Greenfield wrote in an April 17 blog post. The company was carrying long-term debt of $48.6 billion as of the end of the year. A prolonged strike could actually boost earnings and free cash flow in the current year while pushing some spending into 2024 or 2025, he noted.
And if it lasts long enough, the WGA strike could allow studios to use “force majeure” clauses in their contracts to sever deals made with writers. “Force majeure” is a legal term common in contracts which addresses unforeseen or catastrophic circumstances.
“While we would not expect Warner Bros. to terminate its deals with star writers such as Chuck Lorre or Universal with Dick Wolf, there are lesser-known writers who struck overall deals with studios that do not make economic sense today,” Greenfield wrote. “Terminating out-of-market overall deals could be another positive earnings/free cash flow event for studios.”
A spokesperson for Warner Bros. Discovery declined to comment on that prospect.
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Gerber Kawasaki managing partner Hatem Dhiab told TheWrap that he will be watching for an update on the company’s path to profitability in its direct-to-consumer division. The streaming business will see losses ease in 2023 and break even in the first quarter of 2024, “give or take,” CFO Gunnar Wiedenfels said in a March investor presentation.
Dhiab will also be keeping an eye on content developments related to the WGA strike and management’s views on streaming royalties, cost-cutting measures to continue reducing the company’s debt, the state of the company’s linear advertising and any color on the Max rebrand.
Goldman Sachs analyst Brett Feldman anticipates “modest net adds” for subscribers in the first quarter as the company prepares for its Max launch in the June quarter. Following the launch, the bank anticipates “a slight pickup in net adds” as the company targets 130 million global subscribers by 2025.
Meanwhile, CFRA director of equity research Ken Leon told TheWrap he’ll be listening in for any remarks on potential asset sales to raise cash; management views on content spending, sports and NBA renewal contract discussions; and updates on its movies, shows, strategy with HBO and its upcoming free ad-supported streaming television offering slated to launch later this year.
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In January, Ampere Analysis predicted that Warner Bros. Discovery and Disney would overtake Comcast and its subsidiaries to become the leading investors in original content in 2023, with Disney’s budget estimated to reach $10.5 billion and Warner estimated to exceed $9.5 billion.
In December, Warner Bros. Discovery estimated that it would incur up to $5.3 billion in total pre-tax restructuring charges, including up to $3.5 billion in content impairment and development write-offs. The restructuring is expected to be “substantially completed” by the end of 2024, the company has said.
Analysts are expecting Warner Bros. Discovery to report earnings per share of 21 cents on revenue of $10.6 billion. But Fitz-Gerald Group founder Keith Fitz-Gerald is skeptical that the company will meet Wall Street expectations.
“I think the company is going to be very lucky to achieve the expected results,” he told TheWrap. “If they do, it’ll be a hat trick pulled off against incredible odds. Streaming is hypercompetitive, consumers are increasingly fickle and advertising revenues are not what they used to be.”
Fitz-Gerald added that he does not expect the writers’ strike to be a “needle mover” unless there’s a hint that it could interrupt new content.
“WBD has been an unmitigated disaster since being spun off of AT&T,” Heritage Capital founder Paul Schatz told TheWrap.
He said, the company is “in a highly competitive, crummy-margin business where growth has slowed significantly not to mention the decline in ads sales due to an economy heading into a mild recession. They have a mountain of debt and not enough cash. This challenge will worsen as the economy continues to slow.”
Shares of WBD were up 35% since the beginning of the year at the close of trading Wednesday — but had fallen a similar amount in the past 12 months, shortly after the WarnerMedia-Discovery merger that created the company closed.
For all of TheWrap’s WGA strike coverage, click here.
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