Warner Bros. Discovery Misses Q2 Expectations, Loses 1.8 Million DTC Subscribers Amid Max Rebrand

Warner Bros. Discovery missed Wall Street expectations for its second quarter of 2023 after reporting a net loss of $1.24 billion on Thursday, or 51 cents per share, on revenue of $10.36 billion.

Analysts surveyed by Zacks Investment Research were expecting a loss of 38 cents per share on revenue of $10.48 billion.

The results come after a busy quarter for the company, dominated by the Max rebranding of its streaming service on May 23 and a splashy marketing campaign for “Barbie.”

The company reported $1.72 billion in free cash flow, more than double the $789 million of the year-ago quarter, primarily driven by higher cash from operations, partially offset by higher capital expenditures after the close of the WarnerMedia-Discovery merger. Wall Street is closely watching the company’s cash flow as a sign it can pay down its nearly $48 billion debt load.

Cash provided by operating activities increased to $2 billion, primarily driven by higher operating profits net of taxes, working capital improvement driven by initiatives, and lower net content spend, partially driven by the approximately $100 million impact of the Writers Guild of America strike.

Warner Bros. Discovery repaid $1.6 billion in debt during the quarter, ending it with $47.8 billion in gross debt, 4.6 times leverage and $3.1 billion in cash on hand. It also launched a tender offer for up to $2.7 billion.

“We remain bullish with respect to our delevering story and expect to be comfortably below 4 times levered by the end of the year and at our target of 2.5-3 times gross leverage by the close of 2024,” Warner Bros. Discovery CEO David Zaslav said in a statement.

The direct-to-consumer division, which includes traditional HBO cable subscriptions and the Max and Discovery+ streaming services, lost 1.8 million subscribers during the quarter for a total of 95.8 million globally and reported an adjusted EBITDA loss of $3 million, a $555 million year-over-year improvement. Executives said its streaming business remains on track to reach profitability in 2023.

“We did see several 100,000 subscribers churn off during the quarter, meaningfully less than we had anticipated,” chief financial officer Gunnar Wiedenfels told analysts on Thursday’s earnings call. “While we do expect to see some more elevated churn on Discovery+, we also see engagement patterns consistent with what we saw prior to Max, making us optimistic that our strategy to keep offering these two products was the right one for customers and for our business.”

Revenue for the segment climbed 14% year over year to $2.73 billion. Distribution revenue fell 2% year over year to $2.19 billion: A decline in wholesale subscribers pulled down the total despite growth in Max, HBO Max, and Amazon Prime Video Channels subscribers. Advertising revenue increased 25% year over year to $121 million. Content revenue came in at $410 million, as Warner Bros. Discovery pushed to license HBO shows to streaming competitors, a recent strategic shift. Average revenue per user came in at $11.09 domestically, $3.65 internationally and $7.71 globally.

Zaslav noted that the migration of subscribers to Max has gone “exceedingly well,” with the majority of U.S. subscribers successfully transferred.

“We’re preparing to launch Max in markets around the globe over the next year plus there were significant opportunities internationally in markets we have yet to attack,” he added. “And importantly, the platform now has full capability to deliver live programming. We’ll have more to say about that.”

In the Studios segment, revenue fell 24% year over year to $2.58 billion. The June-end quarter included marketing expenses for “Barbie” but no theatrical revenue from the film, which debuted in theaters last month. The segment posted adjusted EBITDA of $306 million.

TV revenue declined primarily due to the timing of production, fewer CW series, and fewer series sold to owned distribution channels, while home entertainment and theatrical revenue declined due to the strong performance of its film slate last year, including “The Batman.” Games revenue was lower due to the release of “LEGO Star Wars: The Skywalker Saga” in the prior year.

In the company’s Networks segment, which includes cable TV networks like CNN and Discovery, total revenue declined 5% year over year to $5.75 billion. The segment posted adjusted EBITDA of $2.16 billion.

Content revenue fell 18% year over year to $284 million, which the company attributed to the timing of internal licensing deals. Distribution revenue fell 1% year over year to $2.94 billion, driven by increases in the carriage fees paid by cable and satellite providers, which were more than offset by declines in U.S. pay-TV subscribers.

Advertising revenue fell 13% year over year to $2.44 billion, driven by audience declines at the company’s entertainment and news networks and a softer advertising market overall. Last year, the company broadcast the NCAA March Madness Final Four and Championship this year, and its absence hurt the company’s comparative results, though the broadcast of the NHL Stanley Cup Finals this year helped offset that.

Wiedenfels said that Warner Bros. Discovery has been “working diligently with the respective leagues and teams to formulate a plan to exit the [regional sports network] business in a manner that minimizes the disruption to teams and their fans.”

“We expect each of the networks will be sold or operations seized by the end of the year,” he said, adding that most of the impact from the wind-down would be seen in the fourth quarter and next year.

Looking ahead, Warner Bros. Discovery said it expects to generate cash flow in the “$1.7 billion ballpark” in the third quarter and $4.5 billion to $5 billion for full year 2023. The forecast assumes cash restructuring and integration related costs of roughly $1.2 billion for 2023.

The company expects adjusted EBITDA for the year to settle towards the low end of its target range of $11 billion to $11.5 billion. In the DTC segment, WBD expects EBITDA losses of “no more than a couple $100 million” for full year 2023.

“Uncertainty in the studio segment has increased with the dual strikes. This may have implications for the timing and performance of the remainder of the film slate, as well as our ability to produce and deliver content,” Wiedenfels added. “While we are hoping for a fast resolution, our modeling assumes a return to work date in early September. So if the strikes run through the end of the year, I would expect several $100 million of upside to our free cash flow guidance and some incremental downside for adjusted EBITDA.”

Shares of WBD fell 3% as markets opened on Thursday.

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