Warner Bros. Discovery, Inc. (WBD) on Q2 2022 Results - Earnings Call Transcript

Operator: Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the Warner Bros. Discovery Second Quarter 2022 Earnings Conference Call. Additionally, please be advised that today’s conference call is being recorded. I would like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may now begin. Andrew Slabin: Good afternoon and welcome to Warner Bros. Discovery’s Q2 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I’d like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance. These statements are made based on management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our Form 10-K for the year ended December 31, 2021, our quarterly report on Form 10-Q for the quarter ended March 31, 2022 filed with the U.S. Securities and Exchange Commission on April 26, 2022, and our quarterly report on Form 10-Q for the quarter ended June 30, 2022, which is expected to be filed with the SEC on or about August 4, 2022 as well as our subsequent filings made with the SEC. A copy of our Q2 earnings release is available on our website at ir.wbd.com. We released a trending schedule with pro forma results and additional financial information, which also can be found on our website. And lastly, our discussion today will include an accompanying slide presentation, which following the call, will be available on our website. And with that, let me turn the call over to David. David Zaslav: Hello everyone and thank you for joining us. We have had a very busy and productive 4 months since launching Warner Bros. Discovery. And today, we want to provide you with an update on where we are and where we are headed. Among our top priorities have been combining the rich legacies of these two great organizations, building out our senior management team and beginning to integrate the cultures into one global operating company. We have made significant progress on all fronts. Nearly our entire senior leadership team is in place, and I could not be more excited to continue locking arms with the exceptionally talented group of individuals that we’ve assembled from both legacy companies. Plus more recent additions like esteemed filmmakers, Mike De Luca and Pam Abdy, now at the helm of Warner Bros. Pictures Group, and a uniquely talented media operator, Luis Silberwasser, driving our leading global sports strategy. And just last week, we announced our new Chief of Diversity, Equity and Inclusion. Asef Sadek. Asef previously served as Head of Diversity Equity and Inclusion International for WarnerMedia and is one of the most dynamic leaders in the diversity space. Since the close of the deal, the entire leadership team has been moving as quickly as possible to integrate key elements of our business, assess growth opportunities and make important progress in our synergy capture and strategic planning. We’ve been able to dig deeper into the financials and have gained a much better, more complete picture of where we are and the path forward including identifying some additional and unexpected challenges that have and will continue to require our focus and attention. The upside is that there is even more room for improvement in cost savings. At the same time, we’re keeping a close eye on the many cross currents and headwinds at play in the macroeconomic environment, both here in the U.S. and globally, including inflation, the threat of recession and the complexities of today’s geopolitical environment. In light of all these factors, we’ve had to make some additional adjustments, which we’ll talk about. Gunnar will walk you through our financials and the path forward in a few moments. Suffice to say, we are more confident than ever in the strength of our position and believe we are on the right path to meet our strategic goals and really excel, both creatively and financially. Our long-term investment thesis is truly compelling, and we have great conviction in the opportunity ahead. Warner Bros. Discovery has the most powerful creative engine and bouquet of owned content in the world, as highlighted by our recent 193 Emmy nominations, more than any other media company. The fact is there are only a handful of companies globally that can do what we do. And putting it all together, we believe no one does it better than us, spanning HBO, Warner Bros. Film and Television studios, CNN, our world-class sports business and category-defining lifestyle and nonfiction content engines. Our asset mix, one of the most complete and diversified in the industry, uniquely positions us to drive a balanced approach to creating long-term value for shareholders. It represents the full entertainment ecosystem and an ability to serve consumers across the entire spectrum of offerings from premium pay to linear and free-to-air, theatrical to streaming. This was the driving force to create this company over a year ago. Our objective was not only to be one of the top global streaming companies, but also a media company able to drive financial returns by distributing our content on every platform, and our conviction has not changed. While we are still in the very early stages and helped by the first wave of our synergy initiatives, we will have repaid $6 billion in debt by the end of August, and we have implemented initiatives leading to $1 billion in run rate synergy over the next 12 months with at least an additional $2 billion in the works as part of our cost synergy plan. We did very well at the upfront and believe we have meaningfully outperformed our peers. As I said in our presentation, we see ourselves as essentially the fifth broadcast network due to our unparalleled portfolio and our low to mid-teen CPM increases or nearly $6 billion in commitments clearly demonstrates that advertisers now view us exactly that way. We offer our partners the most complete portfolio of live sports and news, lifestyle and entertainment and our average share of viewership outside of the football season exceeds 25%. On some nights, we’re bigger than NBC, ABC, CBS and Fox combined. While there’s a lot of uncertainty in the economic backdrop, this is a strong proof point for the value we bring to the table, and our ability to improve monetization over time. In many ways, we are just getting started and have really only begun to scratch the surface with respect to the potential upside. And believe we’ll make even more headway in the next 2 to 3 years. At every stage of this endeavor, as we pursue opportunities and tackle challenges, build and grow our business, we will be guided by three strategic priorities that will inform all of our planning and decision making. First, we will seek to attract the best storytellers and use our unparalleled creative engine, franchises and brands to produce the most compelling and diverse content offering in the world. We are home to many of the most iconic brands and franchises in the history of entertainment: Batman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones, CNN, HBO, HGTV, Discovery, Warner Bros. Pictures, Warner Bros. Television and many, many more. The opportunity this presents is truly unmatched. We’re also the preeminent maker and seller of content in the world. And going forward, we will continue to invest smartly in content in ways that will help us to grow, achieve greater market share and have a bigger impact. Some of the content we create will be distributed on our platforms like the highly anticipated House of the Dragon premiering on HBO Max later this month. And some will lay on other platforms such as Ted Lasso and Abbot Elementary. Our focus is on making great content, content that people want to watch and will pay for. As I have said, it’s not about how much, it’s about how good. Owning the content that really resonates with people is much more important than just having lots of content. In other words, at a time when almost every piece of content ever made is available to consumers across any number of free and pay services, duration, quality and brands have never been more important. And that is what we do best. When the measure is who’s got the best stuff, no one has a better hand than we do. Second, we will maximize the reach, engagement and overall value of our content through a broad distribution and monetization strategy. Our job is to tell great stories and to bring them to as wide ranging in audience as possible in as many ways as possible and to deliver the greatest viewing experience possible. Certainly, technology plays a big role in this, and we still have a lot to learn, but it’s equally important that we be flexible and agile, able to respond to ever-changing consumer preferences. As the maker and owner of the largest and most complete library of content in the world, we cover more surface area than almost any other media company, theatrical, streaming, linear, cable, free-to-air, gaming, consumer products and experiences, our own platforms, other’s platforms. And we have no intention of being beholden to any one in particular or to a specific business model. Simply put, we are open for business. There has been a lot of experimentation in our industry, and we are all smarter for it. At Warner Bros. Discovery, we believe strongly in the importance of preserving optionality and driving returns through a strategic mix of distribution and windowing options. For example, we will fully embrace theatrical as we believe it creates interest and demand, provides a great marketing tailwind and generates word-of-mouth buzz as films transition to streaming and beyond. When you are in theaters, the value of the content and the overall viewing experience is elevated. Then when the same content moves to PVOD and then streaming, it is elevated again. As films move from one window to the next, their overall value is elevated, elevated, elevated. We saw this clearly demonstrated with the Batman and Elvis. We have a different view on the wisdom of releasing direct-to-streaming films, and we have taken some aggressive steps to course correct the previous strategy. With respect to streaming, our main priority right now is launching an integrated SVOD service. And in a few moments, JB will talk more about the strategy and some of the key building blocks and milestones as we bring HBO Max and Discovery+ together under one offering. Our streaming strategy has evolved over the past year and really reflects the importance of, rather than the dependence on, this segment of our global content monetization plans. I am pleased with the work to date and the progress we continue to make on this front. And in the spirit of optimization, once our SVOD service is firmly established in the market, we see real potential and are exploring the opportunity for a fast or free ad-supported streaming offering that would give consumers who do not want to pay a subscription fee access to great library content. While at the same time, serving as an entry point to our premium service, we will talk to you more about our potential plans at our Investor Day, which is planned for the end of the year. I am also pleased to announce today that we have extended our relationship with AT&T, making them a trusted partner in the distribution of HBO Max as part of their service offerings. This is great news for our business as it ensures that even more people will have access to our world-class and award-winning content. This leads to our third strategic priority, and that is to operate as one company with one mission, to be the premier media and entertainment leader globally. We believe the best way to maximize the value of our company is by operating our businesses as a combined enterprise rather than as a series of separate siloed and unconnected business units. HBO, Warner Bros. Pictures, Warner Bros. Television, CNN, our U.S. Networks, Sports, we are stronger together and we will make meaningful progress in operating our businesses as one team. We also have a great ability to promote, advertise and introduce new products and services enterprise-wide and we intend to take full advantage of these capabilities. You saw this with the successful rollout of Elvis across all of our platforms. And you’re seeing it now ahead of the launch of House of the Dragon. We’re employing every capability at our disposal. It is the biggest campaign in HBO’s history, and it’s already paying dividends. Rewatching of the original Game of Thrones is up dramatically on HBO Max. We are also going to be opportunistic about the way we grow our business in the future, whether by improving existing products or services to enhance and personalize the consumer experience, introducing new ones or expanding into new markets globally, with particular focus on how to scale smartly with an eye on sustainable free cash flow even during periods of incremental reinvestment. We see ample opportunity to drive significant efficiencies from further integration and transformation, which Gunnar will take you through. It’s a foundational tenet of how we will operate and manage, the byproduct of which will be significant free cash flow generation and growth. So our three strategic priorities are to create the most compelling and diverse content offering in the world; maximize its reach, engagement and value through a broad distribution and monetization strategy; and operate as one company with one mission, to be the premier media and entertainment leader globally. In an industry as dynamic as ours, we are best positioned for success. We have everything we need to thrive creatively and financially, including the greatest and most popular franchises and IP, the most diverse collection of global media brands and assets, the ability to generate awareness and excitement for our products across our own various platforms, a strong leadership team and the most talented creatives. While we’re still in the early innings, I couldn’t be more excited about where we’re headed as a company. As I said, we are open for business. And if you’re in this business, this is the place to be. We look forward to sharing lots more with you at our Investor Day at the end of the year. And with that, I will turn it over to JB and he will walk you through the details of our SVOD strategy. Jean-Briac Perrette: Thank you, David and hello everyone. Over the last almost 120 days, I have had a chance to spend time with this incredibly talented team, take a closer look at both products and their technology, better understand our proficiencies as well as areas where there is need for further development and dig in on what consumers are saying about the two services. We have a lot of work to do, but these first few months have only strengthened our belief in the significant opportunity ahead of us. And I’m excited to share with you some initial thoughts on our strategy and road map. First, a bit of context. For decades, our industry has embraced changing technology and consumer demand by evolving a very successful windowing approach to exploiting content. However, in recent years, a strategy has emerged that suggests the video business will be better off collapsing all windows into streaming, overpaying for and overinvesting in content and offering it all at the same time for a low price. We don’t believe in this strategy. While we intend for streaming to be a critical part of our company and a key driver of our growth as consumers continue to shift their viewing habits from linear to nonlinear, it’s only one part of our diversified approach. The focus of our streaming strategy is consumer choice. We believe there are multiple global consumer segments in streaming, just like there have been for decades in traditional television. Some who are willing to pay a premium for an ad-free experience, others who are more price-conscious and prefer to pay less with limited advertising, and a sizable third group who will not pay a subscription fee and only want to enjoy ad-supported entertainment. Warner Bros. Discovery’s unmatched depth and breadth of content provides us the opportunity to offer something for everyone. Providing consumers with a range of entertainment options will maximize our reach and financial returns. Currently, we’re focused on launching our combined SVOD product with both an ad-light and an ad-free version in many markets. But as you heard, we’ve also begun to explore options of how best to reach consumers in the free ad-supported streaming space. We currently license our library to others, but we’ll assess how best to play in this growing business as the model evolves from free-to-air linear to free-to-view streaming. Now focusing on our ad-free and ad-light SVOD offering, the great news is the combination of HBO Max and Discovery+ could not come at a better time as both are enjoying strong momentum. HBO Max has emerged as the most acclaimed streaming service among consumers and Discovery+ remains one of the top-rated apps and the dominant leader in real-life entertainment. There are also two very unique and complementary streaming services, distinct in their content appeal ranging from premium scripted series like Succession and the much anticipated House of the Dragon to leading unscripted programming such as 90 Day Fiance and Fixer Upper. The two services are also different in terms of how subscribers engage with the content. Some of it being more appointment viewing driving subscriber acquisition, other content being more comfort viewing, driving subscriber retention with people watching hours on end. These are two critical and powerful components of a strong and sustainable subscription business. Couple this with our world-class collection of globally recognized brands, franchises series and characters it is truly an unprecedented combination. In an already crowded market, consumers know these brands, and they trust them to deliver quality. The quality of our content engine speaks for itself as evidenced by the 193 Emmy nominations this year, more than any other media company from drama to comedy, documentaries, the factual, lifestyle, the reality, local series from around the world, the sports in Europe and Latin America, and of course, movies. Ahead of the launch of our new combined service, we are introducing a number of exciting interim initiatives. First, content sharing. As we announced earlier today, Discovery+ will add a CNN Originals Hub on August 19, making it the home of the award-winning CNN series and films, including the Anthony Bourdain collection and featuring series such as This Is Life with Lisa Ling and Stanley Tucci: Searching for Italy. And starting later this fall, HBO Max will begin hosting some of the Magnolia content from the incomparable Joanna and Chip Gaines, including their latest series Fixer Upper: The Castle arriving in October. Second, as David mentioned, we are leveraging the marketing power of our combined portfolio with the biggest TV audience many nights in the U.S., the second largest broadcast group in Europe, the number one pay-TV portfolio in Lat Am and leading pay-TV lineup in APAC. We will drive significant awareness for our content and streaming products, much at no cost given the creative use of unsold or noncommercial inventory. Shark Week is just one recent example of the marketing benefits and financial synergies we see from strategic cross-promotion across our company. Now more about the product and technology. We will roll out our new combined offering under a single brand and we will have more to share closer to launch. On the product side, we recognize that both of our existing products have shortcomings. HBO Max has a competitive feature set, but has had performance and customer issues. Discovery+ has best-in-class performance and consumer ratings, but more limited features. Our combined service will focus on delivering the best of both, market-leading features with world-class performance. To deliver this, our team has developed a clear road map to migrate onto one tech stack, leveraging much of the core infrastructure of the highly rated Discovery+ service with significant and important feature enhancements from the more established HBO Max. Our product design and feature set will enable better content discovery and more personalized choices. All of this, coupled with the unparalleled breadth of quality content, will help drive our leading objective, which is growing engagement. This will, in turn, enable us to meaningfully reduce churn, support gross adds and increased monetization, particularly with our ad-light offering. There’s much work to be done over the coming months from retooling the tech platform to enabling proper content and metadata ingest around the world and ensuring a seamless customer migration for launch. There is lots to do and we are determined to get it right, which will take a bit of time. Our primary focus for the rollout will be in the markets where HBO Max has already launched. Given its broader international footprint, we plan to launch the service sequentially starting in the U.S. next summer. Latin America will follow later in the year, European markets with HBO Max will follow in early ‘24, with additional launches in key Asia Pacific territories and some new European markets coming later in 2024. Of course, as we get more of the development work and testing under our belt, we will explore ways to accelerate the rollout, if and where it makes sense. In addition, there will still be significant opportunity for expansion beyond this as these 70-plus countries represent less than 60% of broadband homes globally, excluding Russia and China. And many of the biggest markets, such as the UK, Germany and Italy do not fall within this 2025 plan. But we want to remain disciplined and prove out the strength of our product and profitability first. All of this culminates in developing a strong, financially attractive business over the next 3 years. Our focus is on shaping a real business with significant global ambition but not one that solely chase the subscribers at any cost or blindly seeks to win the content spending was. Instead, one that scales smartly. So now what does this all mean for the streaming business? Our financial North Star will be EBITDA driven by solid top line growth and greater cost efficiency from the combination of these two products. We expect peak EBITDA losses for the D2C segment will occur this year in 2022 as we do the heavy lifting around technology, personnel and integration ahead of the planned re-launch starting next summer. We are targeting the U.S. streaming business to be profitable in 2024 and for the global streaming segment to generate $1 billion in EBITDA by 2025. Embedded within this target result for 2025 is an EBITDA drag from less mature markets and new market launches. We believe that we can achieve these milestones with a total subscriber base of around 130 million global subs. Today, our total subscriber number for HBO Max and Discovery+ is 92 million, an increase of 1.7 million over first quarter. This number now excludes other streaming products in the portfolio and synchronizes our subscriber definitions, which Gunnar will get into more later. The goal of this is to provide you with a clear and transparent number of true paying subscribers to our core service. You should also note that we estimate an additional overlap of around 4 million subscribers between the two services today. So we anticipate adding more than 40 million incremental sales by 2025. Turning to ARPU. As we just reported, our current ARPU is almost $8 globally, comprised of nearly $11 domestically and almost $4 internationally. We expect healthy ARPU growth off this base due to a few factors. First, a new pricing strategy, consistent with our profitability focus, we will shift away from heavily discounted promotions that were part of the gross ads focused strategy of the past to a more balanced approach that optimizes revenue as well as subscribers. Second, and related to this, price increases, particularly in certain international regions where we are well below market. We will also plan for periodic increases as accepted in the marketplace. Third, scale benefits from broader distribution of our ad-light offering. And as our reach and engagement grow, we will also drive CPMs, leveraging technology enhanced products and targeted advertising. We’ve clearly started seeing the benefits of this at Discovery+. On the cost side, we see meaningful synergies from two particular non-content areas. Marketing, which is over 60% of SG&A, we’ll see benefits by moving to a single branded product leveraging the power of our owned networks as well as more optimized spend. In technology, which is the third largest portion of our OpEx, where we will eliminate duplicative spend, reduce third-party vendors and see significant opportunities for automation. Looking ahead, we will continue to have healthy content investment, but with these two content portfolios coming together, we see smart opportunities to do this at a much more measured pace than in the previous plans. All in, we see long-term margin potential at scale of at least 20% and expect to make significant progress towards that goal over the next few years. Lastly, based on the operating leverage in the business, we believe we can achieve incremental margins of around 50% of every dollar of additional revenue growth. To summarize, at Warner Bros. Discovery, we believe that in an already crowded market and at a time when the global economy is prompting many consumers to prioritize their purchase decisions, we are uniquely and best positioned to be at the top of global consumers’ lists for video entertainment. Our greatest strength and what positions us for success as a company long term is our ability to monetize our unparalleled collection of content in multiple ways in order to provide consumers choice and optimize asset value. That is what we intend to do and streaming the one key part of our overall strategy. We look forward to sharing more with you as we get closer to launch. And now I will turn it over to Gunnar for a closer look at our Q2 financials. Gunnar Wiedenfels: Thank you, JB, and good afternoon, everyone. As you heard from JB, we are taking thoughtful approach in how we intend to scale our D2C business smartly and methodically. And it’s just one component of a more balanced distribution strategy versus one that seeks to drive subscriber growth at any cost. This will be an important theme throughout the discussion of our second quarter financials and our outlook for the balance of the year as well as 2023. Turning to our financials. As you can see, it’s been an extremely busy first full quarter as a combined company, strategically, operationally and financially. Picking up from when we spoke to you last, while we have already implemented a significant number of initiatives following the closing of the WarnerMedia transaction, we’ve only become more confident about the long-term potential for Warner Bros. Discovery. The strategic logic behind bringing these two great companies together is as apparent and sound as when we announced the deal. As noted prior, the recently concluded upfront is a timely example of just that. Despite the more challenging macro environment, we’re very pleased with our performance, which proved the enormous value of our content portfolio to our advertising clients and as a differentiated means to service brands. Out of the gate as a combined company, we have been focused on debt pay-down and I am pleased to report that by the end of this month, we will have paid down $6 billion of debt since closing the transaction. We are equally as focused on integration and efficiency, and I’m very pleased with the progress of the synergy program. We now have 1,000 individual initiatives staffed. Measures already implemented worth $1 billion of run rate savings, the clear grip on milestones and business cases for at least another $2 billion in flight and eyes on further upside and opportunities. We will continue to update the market on progress as well as implications for related cost to achieve as we move our synergy program through the implementation stages. Now I’d like to very briefly address our Q2 results, which we are providing in a new segment structure. The composition of our new segments is very similar to the way Time Warner are presented previously. In addition to the second quarter financials, we also provided trending schedules, including 2021 segmented pro forma financials with the earnings release this afternoon to give you a financial baseline for Warner Bros. Discovery. The trending schedules are also available on our Investor Relations website. I will speak to the second quarter financials on a reported basis. And we’ll address growth rates on a pro forma combined FX basis, as always, to provide more transparency on underlying performance. Let’s turn to the individual segments, starting with Studios. Studios results were driven by strong games performance, specifically behind LEGO Star Wars: The Skywalker Saga as well as consumer products, while home entertainment and theatrical face difficult comparisons against last year’s strong COVID-lifted catalog sales and larger film slate. With the Networks, revenue was up 1% and EBITDA was down 11%. Advertising increased 2% globally, largely driven by sports on the Turner Nets in the U.S. while international advertising was down modestly, in large part due to the sale of Chilevisión last September as well as a decline in EMEA. Global Distribution revenue was down slightly with the U.S. flattish and international down 3%, which was impacted by pricing declines in Western Europe. EBITDA decreased in part due to increased sports rights cost versus last year. Within D2C, revenues increased by 4%, while adjusted EBITDA declined $325 million year-over-year. Performance was mainly driven by: number one, substantial content investments across the global footprint as part of the push to launch HBO Max in as many markets as possible prior to closing the deal; as well as number two, revenue pressures in the wake of sunsetting the Amazon distribution deal last September; and number three, tough prior year comps with 2021 enjoying the benefit of the day and date windowing strategy for Warner Bros. feature films. Consistent with our prior comments, we continue to thoughtfully spend ahead of the launch of our integrated product. In part, having put some planned new country launches on the back burner, but we are gearing up and are very excited for the global release of House of the Dragon in August, the highly anticipated prequel to Game of Thrones. Importantly, we are changing the way we present our D2C subscriber numbers going forward to align our subscriber definitions across the legacy Discovery and WarnerMedia businesses. Starting with the paying subscriber count reported on our Q1 earnings call of roughly 100 million subscribers, we have made the following key adjustments that totaled 10 million subscribers. First, the HBO Max subscriber number historically included certain unactivated subscribers under the AT&T Mobility distribution agreement. Consistent with legacy Discovery policy, we will exclude such unactivated subscribers going forward. Second, as JB detailed, we have refined our strategy with a clear focus on one combined D2C product. As such, going forward, we will exclude non-core D2C subscribers outside of the Discovery+ or HBO Max products from our account, such as subscribers of MotorTrend, Eurosport Player and a few smaller other products. Against this harmonized definition, we ended Q2 with 92.1 million subscribers, representing 1.7 million sequential net adds during the quarter. Please refer to the aforementioned trending schedules for historical subscriber data as per the harmonized definition. Please note that while we have adjusted our ARPU calculations for the corresponding revenues, total Warner Bros. Discovery D2C segment revenue will still include fees received from N4. Those subscribers no longer included in our core subscriber count. Now turning to the consolidated group. On a consolidated basis, revenue was down 1%, driven by increased intercompany eliminations, impacted by larger internal sales and licensing, while adjusted EBITDA was down 31% or $812 million year-over-year. These results are driven by the legacy WarnerMedia businesses with significant cost increases across all segments. Please note, year-on-year, FX was a $228 million headwind to revenues and a $30 million headwind to adjusted EBITDA during the quarter. Despite the many crosscurrents running through our P&L at the moment, we ended the second quarter with $789 million of reported free cash flow. This included approximately $250 million of cash restructuring and one-time charges related to the merger and integration. With respect to overall Q2 financial performance, clearly, these results are neither indicative of the health of the underlying assets nor of their longer-term trajectory, but rather the fact that we’re starting from a less favorable position compared to our expectations. In addition to the clearly more challenging macroeconomic backdrop and a changing industry dynamic in the streaming space, we have also now had an opportunity to fully assess legacy WarnerMedia’s financials post-closing. Having concluded this process, we determined that certain legacy WarnerMedia budget projections that were made available to us prior to closing, varied from what we now view as legacy WarnerMedia’s budget baseline post-closing. On taking a deep dive in pressure testing, what we found, our assessment has resulted in lower EBITDA projections. Specifically, we identified a number of approved investments and foregone revenue in various parts of the business that, when taken together, impacted full year 2022 EBITDA by roughly $2 billion. Some examples of these business decisions include: number one, significant reductions in external content sales. As part of a corporate initiative to prioritize HBO Max growth globally, new content licensing deals to third parties were largely halted and content was, in general, made exclusive to HBO Max. This is, of course, an upside opportunity over time as we ramp initiatives back to a balanced level of monetization depending on relative value contributions. Number two, similarly, certain actions taken to limit HBO Max B2B distribution provided a headwind to performance, and we believe there may be opportunities to course correct. Number three, substantial investments in kids and animation content for both linear and D2C platforms without an adequate investment case against them. Number four, substantial investments in direct to HBO Max films, for which, again, we did not find sufficient support. This means adjusting the way we invest going forward and also evaluating those projects already completed or in progress. Wonder Twins, Batgirl and Scoob!: Holiday Haunt are examples of streaming films that do not fit this new strategic approach. These are difficult decisions, but we are committed to being disciplined about a framework that guides our content investment for maximum return. Number five, significant incremental and loss-making content investments for the Turner networks. Specifically content spend on shows that did not have a path to generate sufficient ratings or incremental monetization potential. And number six, incremental corporate expenses transferred from AT&T resulting from the spin-off of WarnerMedia as per the final carve-out financials. While these factors will, of course, impact our 2022 financial performance and 2023 to a lesser extent, we have implemented immediate measures to address and redirect the trend line. Most importantly, supported by key leadership changes and the introduction of a more robust framework for capital allocation based on financial metrics and measured KPIs. Key measures include: number one, the shutdown of CNN+. Number two, restructuring the scripted content portfolio on the linear net, kids and animation, direct to HBO Max films as well as international local content not sufficiently supported by robust enough investment cases. Number three, a more balanced approach to external licensing as we embrace a more holistic content monetization model for Warner Bros. Discovery globally, generating significant revenue upside while protecting key strategic franchises such as Friends, Big Bang Theory, Game of Thrones, etcetera. Number four, implementing an HBO Max distribution strategy aimed at wide availability as opposed to D2C only distribution. As well as number five, greater accountability, alignment and communication across businesses. Turning now to synergies. Our work on integration and transformation since closing gives us increased confidence in the synergy opportunity. Every day, over the past 15 weeks, I have experienced the muscle memory that many on our integration teams have built over the past years of change and integration. We have already implemented initiatives totaling more than $1 billion of run rate impact. This will grow from this point, the opportunity to implement transformational change across the global organization is enormous, and we’re being thoughtful about its prioritization and cadence. Individual initiatives range from direct merger-related opportunities such as consolidating our real estate footprint against hybrid and agile work environments to opportunities tied to David’s operating philosophy as one integrated company. The latter opens up tremendous transformation potential along systems integration, process harmonization and importantly, optimize utilization of our O&O promotion and advertising potential. I am very pleased with how well the program has progressed so far and based on the savings potential in our initiative funnel, I have full confidence that we will expect at least $3 billion of synergies overall, with $2 billion to $3 billion of synergy realization in 2023. Naturally, we will update the market regularly as certainty on value and timing increases. With that, I want to share our current thinking on the 2022 and 2023 financial outlook. As you may recall, we first developed our guidance for the combined Warner Bros. Discovery 15 months ago. Today, after 100 days of thorough analysis and financial planning post close, we are adjusting our 2022 and 2023 EBITDA outlook, primarily based on: first, a less favorable macroeconomic backdrop resulting in a more conservative outlook overall and for ad sales specifically. Second, a change in the streaming industry dynamics and our strategic response. And third, as noted earlier, the difference is in legacy WarnerMedia budget projections that were made available to us prior to closing versus what we now view as legacy WarnerMedia’s budget baseline post closing. Taking all these factors into account, 2022 will clearly be a transition year, and we see an adjusted EBITDA in the range of $9 billion to $9.5 billion. For further context, I’d like to provide some color on third quarter trends. Global advertising revenues in the third quarter will be impacted by some tough prior year comps, specifically the Summer Olympic Games, two NBA Eastern Conference finals games played in early July last year, as well as the sale of Chilevisión. And given the less favorable macro environment, we are seeing softer demand and the scatter market at the moment. As such, we expect Q3 global ad sales to decline by high single to low double digits based on current booking trends. On the positive side, we are beginning to see the impact of our course correcting measures and we expect some synergy capture beginning in the back half of this year. Furthermore, we expect to generate free cash flow of around $3 billion after cash cost to achieve in 2022. On that basis, I am expecting net leverage at year-end to be approximately 4.8x. Turning to our outlook for 2023. Based on the full year impact of our 2022 corrective actions and $2 billion to $3 billion of synergy realization in 2023, we expect adjusted EBITDA to be at least $12 billion. We expect to convert approximately third to half of our adjusted EBITDA into free cash flow in 2023 as we make progress towards our long-term target of approximately 60%. The cadence of content investments, restructuring spend, CapEx and working capital improvements will impact the timing of free cash flow generation. With that, I want to give a quick snapshot on our balance sheet. We are reiterating our long-term gross leverage target of 2.5 to 3x, which we expect to hit by the end of 2024, and our gross leverage will be within our current ratings category by mid-2024 or earlier. As stated before, we will continue to dedicate virtually all free cash flow generated to debt reduction until then. We had $53 billion of total debt at the end of Q2, including $6.5 billion of term loans. Importantly, our debt financing is generally long-term with an average maturity of more than 14 years and a 4.3% average interest rate and equally importantly, interest rates for the vast majority of our debt are fixed. We have no remaining payments due in 2022, and we currently have $1.3 billion due in 2023 and $4.3 billion due in 2024. Also note, earlier this week, we finalized the post-closing working capital adjustment process with AT&T as part of the merger agreement. And as a result of that, AT&T will pay us $1.2 billion in August. With that, and combined with prepayments made in July, by the end of August, we will have paid down $6 billion since closing the transaction in April. We have covered a lot of ground today, but we’ve really only scratched the surface with respect to the significant amount of strategic work being done across the organization. And we will take you through a much deeper dive with a comprehensive look across continent networks as well as D2C at our Analyst Day towards the end of the year. In closing, if there is one key message to take away is that we have never been more excited about the underlying strength of the creative bedrock of this combined company and the broad monetization opportunities for decades to come. David’s leadership team has come together quickly, and we’re fully focused on driving hard to deliver the value upside of this combination, and I remain excited to share our progress with you along the way. With that, I’d like to turn it over to the operator, and David, JB and I will be happy to take your questions. Operator: Thank you, sir. Your first question will come from Bryan Kraft at Deutsche Bank. Please go ahead. Bryan Kraft: Hi, good afternoon. I need to ask two, if I could. I guess, first, David, there is a lot of reporting in the press about some rates being delayed and of course, the canceling of Batgirl. I think that film, in particular, was almost completed. Can you just talk about the reason for decision to cancel Batgirl? What’s the issue? And what’s happening more broadly, Warner Bros. film business, changes you might be making and basically the direction you’re taking with the DC universe? And then just had one for JB on the SaaS product. Is the intent there to offer the SaaS service in Western markets like the U.S. where consumers are accustomed to paying for content or will it be more limited to markets where you’ve got – where you would have a low penetration of paid services and therefore, way of building penetration where you might not otherwise achieve it? Thank you. David Zaslav: Great. Thanks, Bryan. Well, let me start with the fact that the Warner Bros. Motion Picture Group has fantastic IP and a great history, as you know, when they are turning 100. And between DC., the animation group together with the entire Warner library, our ambition is to bring Warner back and to produce great high-quality films. And as we look at the opportunities that we have, broadly, DC is one of the top of the list for us. We – when you look at Batman, Superman, Wonder Woman, Aquaman, these are brands that are known everywhere in the world, the ability to drive those all over the world with great story is a big opportunity for us. We have done a reset. We’ve restructured the business where we’re going to focus – where there will be a team with a 10-year plan focusing just on DC. It’s very similar to the structure that Alan Horn and Bob Iger put together very effectively with Kevin Feige at Disney. We think that we could build a long-term, much stronger sustainable growth business out of DC. And as part of that, we’re going to focus on quality. We’re not going to release any film before it’s ready. We’re not going to release a film to make a quarter. We’re not going to release a film under – the focus is going to be how do we make each of these films in general as good as possible. But DC is something that we think we can make better, and we’re focused on it now. We have some great DC films coming up, Black Adam, Shazam and The Flash. And we are working on all of those. We’re very excited about them. We’ve seen them. We think they are terrific, and we think we can make them even better. And that’s what Mike and Pam and the team are doing and focusing on that. Strategically, we’ve looked hard at the director streaming business. We’ve seen luckily by having access now to all the data, how direct-to-streaming movies perform. And our conclusion is that expensive direct-to-streaming movies in terms of how people are consuming them on the platform, how often people go there or buy it or buy a service for it and how it gets nourished over time is no comparison to what happens when you launch a film in the motion – in the theaters. And so this idea of expensive films going direct-to-streaming, we cannot find an economic case for it. We can’t find an economic value for it. And so we’re making a strategic shift. As part of that, we’ve been out in the town talking about our commitment to the theatrical exhibition and the theatrical window. A number of movies will be launched with shorter windows. Some might have different kinds of marketing campaigns where we take advantage of us having the biggest platform and a platform that all motion fiction companies look for. But we will always be agile. Our focus will be on theatrical. And when we bring the theatrical films to HBO Max, we find they have substantially more value. And we have an ecosystem where we can have the premier motion picture business. That’s why most people move to Hollywood. That’s why most people got in this business to be on the big screen when the lights went out and that is the magic. And the economic model is much stronger. And the other thing is that we’re going to focus very hard on quality. I said we’re not going to launch a movie until it’s ready. We’re not going to go into movie to make a quarter. And we are not going to release a movie and we’re not going to put a movie out unless we believe in it. And that’s it. I mean, particularly with DC, where we think we want to pivot and we want to elevate and we want to focus. Jean-Briac Perrette: And Bryan, on fast, two quick comments. Number one is just a reminder that as we look at that space, the content we’re talking about for – that would be in that kind of a product would be totally different than the content it will be in our premium SVOD offering. So number one, the distinction is totally different and with over 100 titles – episodes across our combined portfolio. There is a lot of content that wouldn’t necessarily make sense in a premium product that might make sense to the fast. The second thing is on market by market, look, that’s part of the assessment that we’re going to – we’re looking at and we will look through over the next few months. And as we have more details of how we think and where we think the opportunity is the richest, we will come back to you and take you through it. David Zaslav: Just – the objective is to grow the DC brand, to grow the DC characters, but also our job is to protect the DC brand, and that’s what we’re going to do. Bryan Kraft: Thank you. Andrew Slabin: Great. Operator, next question please. Operator: You next question comes from Jessica Reif Ehrlich of Bank of America Securities. Please go ahead. Jessica Reif Ehrlich: Thank you. I hope you meant questions. So if it’s okay, I’d actually like to go around to each one of the speakers. David, one thing – I mean, you have an amazing set of assets, but one thing that’s clearly being challenged are your linear networks. I think the big surprise in Q2 results so far is how bad the video sub losses are in the U.S. So could you just talk about your – kind of your longer-term view of your linear networks? For JB, just on the content side, it sounds like sports news are going to be an important part of your content strategy. How different is that from linear? How are you thinking about getting new content for direct-to-consumer? And then, Gunnar, just on the guidance, so if you take your ‘22 guidance of $9 billion to $9.5 billion plus $2 billion to $3 billion, I guess, synergy, we’re at $11.5 billion to $12 billion for ‘23 as a base. But what about – if D2Cs – direct-to-consumer losses are peaking this year and coming down, can you give us color on the magnitude upfront? It sounds like pricing was great, film should be normalized. Where do you see the underlying growth? David Zaslav: Well, why don’t I start with the linear business because we’re big believers in the linear business. There is some secular decline. There is been secular decline. It’s leveled off. It’s declined more. In the end, you look at March Madness, the biggest numbers since ‘94. The NBA up dramatically. That was at a time when people said nobody below a certain age is watching. Well, they are tuning in for sport, they are tuning in for news. And when you look at the overall portfolio that we have, live sports, live news, together with entertainment and the best kind of branded non-fiction library where people get up, the levers of food of HG of ID and watch all day. So we think it’s very hard to predict, but we expect it’s going to be a very significant cash generator for us and a very good business for us for many, many years to come. We have a great team running it. This is what we do. It’s what we know how to do. We have a team that’s been doing this for 30 years. If the linear business is a race car, we’ve got a team of race car drivers. And when we hear a noise or it’s in third gear, we know how to fix it. It’s a business we know well. We haven’t begun to implement the libraries that we have now, where we could take content that document – old documentaries on crime from HBO and put them on ID or take programming that exists in the library and move them on each of the cable channels or vice versa. So we just – that hasn’t begun yet. We also are first getting our hands around the idea that we are very often the largest player in America in terms of our reach and the ability to use that now to tell people when they are watching hockey, you could come over now and watch Discovery. And if they want, of course, use our existing platforms to drive viewership from channel to channel. So I’ve been around a long time. Broadcast was dead when I was hanging out with Jack in the ‘90s. That was what people said. But in the end, that reach and the ability to drive advertising product is what kept it alive. We’re still seeing CPM increases. We were in the low to mid-teens this time. We’re big believers, and we think that’s going to help us. Having said that, the great thing that we have is we’re going to have both sides. We have this very compelling free cash flow driver around the world, domestically and around the world. And then we have the dual service, the HBO Max and Discovery+ coming together, together with our full on over the next few years, initiative of having a full basket in traditional and from free to premium to ad-light in digital. And a big advantage in that right now, HBO Max has never been hotter. Quality is what matters, quality is what Casey and that team is delivering. It’s the best team in the business. We’re doubling down on that HBO team. They are all committed under contract, and we’re going to spend dramatically more this year and next year than we spent last year and the year before. Jean-Briac Perrette: Jessica, on the sports and news for streaming, I guess I’d categorize it as on sports, it’s really about experimentation that I’d say – and we’re going to continue to be disciplined. We have essentially two experiments ongoing, which is one where we bundle sports. In this case, Champions League in Brazil and Mexico into our core entertainment offering at the same price as a – really as an acquisition driver, and we are very happy with the results there. And then we got a second one in Europe, where we upsell sports through a – to a buy through tier at a higher price point. And obviously, we will be doing more of that now as we get closer to closing on our BT Sports deal in the UK which is probably will be the biggest experiment on that. And so we love the two experiments we have going, and I think we want to see that play out a little bit more to understand better what is the right strategy there. But we’re going to stay disciplined and smart as it relates to sports. In news, I’d say it’s really more about we see live news is still a critical healthy, important part of the traditional pay-TV ecosystem. And so, live news will continue to be exclusively in that service. But that long-form factual programming from CNN in particular, with their award-winning Originals and CNN films, that has a natural home and a huge demand that we can associate now initially on Discovery+, as we announced this morning, and then eventually sitting firmly within the future product as it comes together. And lastly, on news, we obviously continue to see outside of our kind of core streaming products with CNN.com and the CNN digital services, a lot more opportunities with over 100 million users across the world to continue to experiment with that product and move potentially on ways to find not just ad-supported models, but other models where we can monetize that significant user base that comes to the service. Gunnar Wiedenfels: Okay. And then Jessica, on the guidance. So just to recap, we adjusted our outlook predominantly for three reasons. The macroeconomic outlook that today is a little less supportive than it was 15 months ago or even in April when we last spoke, the industry dynamics in the streaming space and then the differences that we see between projections made available to us prior to closing versus what now the legacy WarnerMedia budget baseline post close. And to answer your question specifically, that you walk from the $9 billion, $9.5 billion for this year to the $12 billion for next year, the math is obviously right. So you are right, $2 billion to $3 billion of synergy capture, as I said. I also do think that we’re going to see some flow through from the course correction measures that we have implemented right after closing that should support the first quarter, second quarter of next year. So if you put that together, the answer is yes, I’m not really assuming any meaningful growth in the underlying or underlying growth in the business as usual in those numbers. The main reason is, as I laid out in the outlook for Q3, is the macroeconomic environment. There are so many factors right now. I just don’t think it’s prudent to guide to a significant underlying improvement here in the core business. That said, we are super excited about the progress we’re making on the synergy side. David spoke a little bit about the linear business. I do think that there are further cost opportunities there. So we will keep monitoring the external factors. We will keep doing the work for the areas that we control and update you as we go along. Jessica Reif Ehrlich: Great. Thank you. Andrew Slabin: Great. Operator, lets go to the next question. Operator: Your next question comes from Doug Mitchelson of Credit Suisse. Please go ahead. Doug Mitchelson: Thanks so much for taking the question. So Gunnar, following through on that, the 33% to 50% free cash flow conversion in 2023, what’s holding that back from your usual 50% to 60% that you talk about? And does that get carried by ‘24 or is that long-term goal of 60%, something that’s going to feather in over a longer period of time? And JB, I’m just curious on what’s your confidence level in the ability to increase engagement? It’s a big driver, I think, of what you’re trying to do. And as that engagement increases and you’re able to monetize advertising at a higher and higher level, is the thought that you keep the price point and let that ad dollars flow through to the bottom line? Or do you lower your ad supported to your price point and try to broaden out the service? How are you thinking about pricing on the ad tier particularly in the United States? Thanks. Gunnar Wiedenfels: Let me start, Doug, with your cash flow question. So bottom line, the drivers behind this third to half conversion guidance are essentially the same that I laid out for the EBITDA outlook. And then in addition to that, we obviously, right now, have a number of moving pieces and cross currents in our financials. As we move through our restructuring, the cost to achieve for our synergy program, there will definitely be some CapEx requirements, and we will have to see how the cadence for our content investment pans out. So these are all factors that are going to impact these numbers, especially sort of from a year-over-year basis. But to your point, I don’t want to give guidance for 2024 yet, but I am confident that we will see continued progress towards that longer term goal. Jean-Briac Perrette: And Doug, on the questions on the streaming. On engagement, I will tell you that I think there is there levers that we think are key and why we are confident in our ability to drive much better engagement. Number one is kind of a brand marketing point, which is, obviously, HBO and HBO Max has stood for something which was a very high-quality premium scripted in particular, drama series. They have never executed a real brand campaign to define what the new service is. And as we think about rolling out our new service, certainly, we will be coming a market with a big noisy campaign, expanding the proposition with a much, much bigger content offering. And so, a, we think the brand and the marketing component of this is significant. Second is, obviously, the content proposition will be drastically enhanced as we bring the two services together with a much more complete array of content across all the genres that I talked through earlier. And then third, the product enhancements can’t be underestimated. We see this from the HBO Max product today, where limitations on search and Discovery really limit the amount of content that is surfaced and viewed by users. And we are confident based on what we have seen from the Discovery+ side and a much more – much broader use of content and a much longer use of watch time that we can actually get the combined product to see a much higher engagement level. That’s one. And two, on the pricing, nothing to share with you at the moment. We are working through a bunch of different scenarios, but this far out from when we will come to market, we really don’t want to discuss specific pricing yet, but we will certainly have more details for you probably as we go into 2023. Doug Mitchelson: Alright. Thank you. Andrew Slabin: Thanks Doug. Let’s move on to the next question please. Operator: Your next question comes from Ben Swinburne of Morgan Stanley. Please go ahead. Ben Swinburne: Thanks. Good afternoon. Wanted to ask you about the longer term outlook for direct-to-consumer. And I know we are going to hear a lot more at your Investor Day, so you might not have a lot of details. But it sounds like you are going to have a bit of a pause here in growing the business as you get everything over to one product and one tech stack. When we think about that 40 million net adds, in the path to $1 billion of EBITDA, should we be thinking about that growth as being really kind of starting at least in earnest back half of next year? And so it’s kind of ‘24 or ‘25 when we will sort of see what this business can do? And then I am just wondering, David, you guys clearly have a view that sort of the streaming at all cost strategy is flawed. I think there is a lot of – probably sympathy for that in the market today. If you look back to 2019 when HBO was mostly wholesale, the business did like $2.5 billion of EBITDA, which wasn’t that long ago. I am just wondering when you think about the long-term opportunity here, can you get back to those kind of economics? I know you just laid out a ‘25 target, but did you entertain the idea of really rolling back the strategy more substantially or at least thinking about reclaiming those historical economics for the business? Thank you. Gunnar Wiedenfels: But actually – this is Gunnar. Let me actually take both questions because I think they are very related. So, we laid out some building blocks for the longer term outlook for D2C. And to answer your question specifically, there are obviously two drivers. One is the revenue growth and the operational gearing from that revenue growth. And I think directionally, you are right. As we said, we are going to be a little more cautious regarding marketing, etcetera, before re-launching. And so a lot of that incremental growth is going to kick in sort of after our JV has re-launched their product in the summer. The other point, though, is cost savings. And as we said before, D2C has a lot of synergy opportunity. We see savings opportunities and synergy opportunities across the entire cost side of the P&L. And that obviously is going to start kicking in earlier. And I mean in the very short-term, we are all super excited about House of the Dragon. HBO, as you heard David and JB say, in the middle of the largest marketing campaign ever, so hopefully, that’s going to be a big helper for the very near-term in this quarter. And then to your point about the long-term perspective, again, the $2.5 billion I don’t want to give an additional number here, but you heard JB say what we think is possible to be achieved, $1 billion in 2025 despite the fact that we are still seeing some start-up losses in that number, even in 2025 for markets rolled out later. And we do continue to see, even for the combined company, a long-term margin opportunity of north of 20%. And that’s on the basis of our combined model now with sort of fully fledged frameworks on the various cost buckets. So, we are confident that this is going to be a great addition – an additional platform. And as we said, not being religious about turning the entire company into a support pipeline for D2C, but D2C as one additional platform. So, I think this is a great outlook. We are excited about it. We are committed, and we will implement these plans and keep you posted. David Zaslav: There was some buzz today about HBO Max, and we are going to start doing less series. And the – our strategy is to embrace and support and drive the incredible success that HBO Max is having. It’s really – the culture and the taste of Casey and the team and the fact that they not only read the scripts, but they fight with all their creatives to make the content and storytelling is as strong as possible. It’s at a very unique moment. We think it’s an extraordinary asset. It
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Warner Bros. Discovery Hit With a Downgrade at Bernstein

Warner Bros. Discovery (NASDAQ:WBD) has been downgraded from Outperform to Market-Perform by Bernstein, with the firm also slashing its price target from $10 to $8, citing a challenging road ahead for the company's recovery. The downgrade follows a disappointing Q2 performance where WBD missed key financial metrics, including a 6% decline in revenue, a 16% drop in EBITDA, and a 43% reduction in free cash flow year-over-year.

Bernstein analysts pointed to the company's struggles since the WarnerMedia-Discovery merger in April 2022, which has seen WBD's stock plummet nearly 70%, making it one of the worst performers in its sector. The firm expressed concern over the "secular challenges" WBD faces in its linear TV business and the company's inability to achieve necessary scale in its direct-to-consumer (DTC) segment. Additionally, the analysts noted increasing investor frustration over WBD's uncertain future, particularly given its declining EBITDA and elevated leverage ratio of 4x.

The potential loss of NBA broadcasting rights, a key component of TNT's programming for decades, was also highlighted as a significant risk that could further compound WBD's difficulties.

Warner Bros. Discovery Reports Wider Q2 Loss, Shares Fall 9%

Warner Bros. Discovery Inc (NASDAQ:WBD) reported a significant second-quarter loss on Wednesday, attributed to a hefty $9.1 billion charge in its networks unit following the loss of NBA media rights.

Shares of Warner Bros. Discovery dropped more than 9% intra-day today. The entertainment conglomerate reported a loss of $4.07 per share on revenue of $9.71 billion, missing Street expectations of a $0.19 loss per share on revenue of $10.07 billion.

The widened loss stemmed from a $9.1 billion hit in its networks segment, exacerbated by a sluggish U.S. linear advertising market and uncertainties related to affiliate and sports rights renewals, including the NBA. Content revenue saw a 6% decline, with a notable 27% drop in EV TV revenue, driven by lower licensing sales.

Global direct-to-consumer (DTC) subscribers reached 103.3 million by the end of Q2, marking an increase of 3.6 million from Q1. The average global DTC revenue per user was $8.00, reflecting a 4% sequential increase in constant currency.

Despite these challenges, the company remains committed to exploring new bundling opportunities to expand the reach of its streaming service, Max. Warner Bros. Discovery emphasized that these initiatives and other strategic actions are expected to drive segment profitability in the latter half of the year and into 2025 and beyond.

Disney and Warner Bros. Discovery Launch Streaming Bundle

Disney and Warner Bros. Discovery's announcement to launch a streaming bundle including Disney+, Hulu, and Max this summer is a strategic move that reflects the evolving landscape of the streaming industry. This collaboration aims to leverage the strengths of both entertainment giants to attract more subscribers by offering a comprehensive package of popular streaming services. The decision to bundle these services was made public on Wednesday, as highlighted by Forbes, signaling a significant shift towards bundling major brands to enhance subscriber appeal and market presence.

Financially, both companies have shown promising results from their streaming services, indicating the potential success of this new bundle. Disney reported a quarterly operating profit of $47 million from its Hulu and Disney+ streaming services, while Warner Bros. Discovery's direct-to-consumer division, which includes the Max streaming service, reported a profit of $103 million in 2023. These figures not only demonstrate the financial viability of streaming services for these companies but also underscore the growth opportunities that lie ahead in the streaming sector.

Warner Bros. Discovery, Inc. (WBD:NASDAQ), in particular, presents an interesting financial profile that could influence the success of the streaming bundle. Despite trading at a loss with a price-to-earnings (P/E) ratio of approximately -6.10, the company's price-to-sales (P/S) ratio of about 0.46 suggests that investors are paying significantly less for each dollar of sales, indicating potential undervaluation. Furthermore, the enterprise value to sales (EV/Sales) ratio of approximately 1.50 and the enterprise value to operating cash flow (EV/OCF) ratio of around 8.30 highlight the company's valuation in relation to its sales and operating cash flow, respectively. These financial metrics suggest that Warner Bros. Discovery is positioned to leverage its streaming services for growth, despite the challenges indicated by a current ratio of about 0.93, which points to potential short-term liquidity concerns.

Disney's CEO, Bob Iger, has expressed optimism about the future of streaming, identifying it as a key growth driver for the company. This strategic bundling of Disney+, Hulu, and Max could not only enhance growth prospects for Disney and Warner Bros. Discovery but also reshape the competitive dynamics of the streaming market. By combining their streaming services, both companies aim to capitalize on their existing subscriber bases and content libraries to create a more compelling offering that could attract a larger audience and drive further growth in the streaming industry.

Warner Bros. Discovery Shares Plunge 13% on Q4 Miss

Warner Bros. Discovery (NASDAQ:WBD) announced its fourth-quarter results that fell short of the average forecasts by analysts. Following the announcement, the company’s shares dropped more than 13% intra-day on Friday.

Facing similar challenges as its peers, Warner Bros. Discovery has been navigating the shift from traditional TV to streaming platforms. CEO David Zaslav highlighted that the company has stabilized its position thanks to a concerted effort to enhance its direct-to-consumer services. He elaborated on a strategic "attack plan" to expand the Max streaming service into crucial international markets and to bolster the studios division with a stronger lineup of releases.

Zaslav expressed confidence in the company's prospects for generating consistent operational progress and improving value for shareholders.

The company's networks segment, home to channels such as CNN and TBS, saw a 14% drop in advertising revenue in Q4. This decline was attributed to shrinking audiences and a sluggish linear ad market in the U.S. Nonetheless, this downturn was partially compensated by increased engagement with Max, leading to a 51% rise in advertising revenue in its direct-to-consumer division.

Overall, the company witnessed a 7% decrease in total revenue to $10.28 billion, below the expected $10.46 billion by Wall Street analysts, while its net loss reduced to $400 million.

Warner Bros. Discovery Misses Q4 EPS and Revenues

Warner Bros. Discovery (NASDAQ:WBD) reported its Q4 results on Thursday, with EPS coming in at ($0.86), worse than the Street estimate of ($0.29). Revenue was $11.01 billion (down 11.3% year-over-year), missing the Street estimate of $11.23 billion, on lower Studios content and Networks advertising revenue.

Adjusted EBITDA was down 5% year-over-year to $2.60 billion, 1.3% above the Street estimates and reflected meaningfully lower DTC losses somewhat offset by lower contributions at Studios and higher corporate costs.

Notably, DTC losses were significantly narrower than expected in the quarter and management is eyeing roughly break-even in Q1/23 ahead of the upcoming domestic launch of the re-imagined streaming service (unveiling slated for April 12th). Cyclical and secular challenges across the linear ad market are weighing on results and sentiment, though it is expected that some of this pressure will abate throughout the year.