Warner Bros. Discovery Stock Tumbles Over 12% on Ad Market Uncertainty

Warner Bros. Discovery’s stock tumbled over 12% on Wednesday after CFO Gunnar Wiedenfels acknowledged uncertainty about when the advertising market might turn around.

Wiedenfels said during the third quarter earnings call that the company would be unlikely to hit its gross leverage target range of 2.5 to 3 times adjusted EBITDA by the end of 2024 without a “meaningful recovery of the television ad market.” WBD ended the third quarter with 4.2 times net leverage.

“It is becoming increasingly clear now that, much like 2023, 2024 will have its share of complexity, particularly as it relates to the possibility of continued sluggish advertising trends. To that point, while streaming advertising remains robust, the state of the overall linear ad market during the during the second half of this year has been disappointing,” he said. “Looking ahead, while it is early, the timing of an ad recovery is currently difficult for any of us to predict with any conviction.”

The company reported a narrowed but wider-than-expected net loss of $417 million, or a diluted loss of 17 cents per share, for its third quarter of 2023. The loss included $269 million in pre-tax restructuring expenses.

The media giant’s total revenue grew 2% year over year to $9.98 billion, beating Wall Street estimates. Total adjusted EBITDA for the quarter grew 22% year over year to $2.97 billion. Analysts surveyed by Zacks Investment Research were expecting WBD to report a loss of 12 cents per share on revenue of $9.94 billion for its third quarter of 2023.

The direct-to-consumer division, which includes traditional HBO cable subscriptions and the Max and Discovery+ streaming services, lost 700,000 subscribers during the quarter for a total of 95.1 million globally, while adjusted EBITDA was $111 million, a $745 million year-over-year improvement and the second profitable quarter in a row for DTC.

Revenue for the DTC segment grew 5% year over year to $2.43 billion. Distribution revenue grew 6% year over year to $2.17 billion. Advertising revenue grew 30% year over year to $138 million, primarily driven by Max U.S. ad-lite subscriber growth and higher engagement per subscriber. Content revenue fell 17% year over year to $120 million, primarily driven by lower third-party licensing.

Average revenue per user came in at $10.66 domestically, $3.37 internationally and $7.38 globally. Wiedenfels said that WBD remains on track to at least break even in its DTC business in 2024.

In the networks segment, total revenue fell 8% year over year $4.86 billion, while adjusted EBITDA fell 9% year over year to $2.39 billion.

Distribution revenue fell 3% year over year to $2.83 billion, 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 fell 12% year over year to $1.7 billion, 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.

Content revenue fell 22% year over year to $215 million, primarily driven by lower third-party licensing deals and lower international sports sublicensing, partially offset by higher inter-segment content licensing to DTC. Other revenue increased 61% year over year to $111 million, largely due to services provided to the unconsolidated TNT Sports joint venture.

In the studios segment, total revenue grew 4% year over year to $3.23 billion, including distribution revenue of $13 million, advertising revenue of $4 million content revenue of $3 billion and other revenue of $209 million. The segment’s adjusted EBITDA was $727 million, down 5% year over year.

Theatrical revenue increased significantly due to the strong performance of “Barbie,” the highest grossing film of the year so far, as well as more titles released in the current year quarter. Games revenue increased meaningfully due to the third quarter release of “Mortal Kombat 1” and continued performance of “Hogwarts Legacy.” TV revenue declined significantly primarily due to certain large licensing deals in the prior year and the impact of the Writers Guild of America and SAG-AFTRA strikes.

In a September filing with the U.S. Securities and Exchange Commission, WBD expected to take a $300 million to $500 million earnings hit due to the strikes. At the time, it lowered 2023 adjusted EBITDA expectations from the company’s $11 billion to $11.5 billion range to a prediction of $10.5 billion to $11 billion. Wiedenfels maintained that 2023 adjusted EBITDA guidance on Wednesday.

Last month, the WGA ratified its new contract agreement with the Alliance of Motion Picture and Television Producers and ended its 148-day strike. Meanwhile, the AMPTP is in the midst of negotiations with SAG-AFTRA, which has been on strike since July 14.

“As we begin to formulate the initial framework of our TV production business getting back to work into 2024, there is simply a lot we don’t know yet,” Wiedenfels said. “We have every confidence this will eventually right itself throughout the next year and there should be an eventual tailwind from the end of the work stoppage. This is an evolving process and there is a real risk at this point that some negative financial impact of the strike will extend into 2024 to some extent.”

Total cash provided by operating activities increased to $2.52 billion during the quarter, while free cash flow climbed to $2.06 billion from negative $200 million in the prior year quarter.

While admitting that the positive swing in free cash flow included some benefits of the strikes, Wiedenfels said that the vast majority of the improvement was the result of its cost-cutting efforts.

“By the end of the year, we will have realized over $4 billion of cost synergies and we will have already implemented initiatives to deliver more than $5 billion [in free cash flow] through 2024 and beyond,” he told analysts on Wednesday.

WBD repaid $2.4 billion in debt during the quarter, with $45.3 billion of gross debt and $2.4 billion in cash on hand.

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