Warner Bros. Discovery, the entertainment conglomerate formed by the merger of WarnerMedia and Discovery, reported its latest earnings, revealing a narrowed quarterly streaming loss. The company fell just short of reaching its second consecutive streaming profit, but its performance exceeded expectations in terms of advertising revenue. Despite challenges in the ad market, Warner Bros. Discovery also raised its post-merger cost savings target to more than $5.0 billion.
During the second quarter ended in June, Warner Bros. Discovery saw a decline in its global streaming subscribers, dropping from 97.6 million to 95.8 million. This decrease can be attributed to the impact of combining Discovery+ and HBO Max into the new streamer Max, which launched in May. Analysts had predicted a drop in subscribers as a result of changes in branding, packages, and prices.
Goldman Sachs analyst Brett Feldman highlighted the overlap of approximately 4 million subscribers between HBO Max and Discovery+, expecting these subscribers to migrate to the Max platform within a few months of its launch. Based on this forecast, Feldman adjusted his domestic net add cadence, projecting a net loss of 2.0 million subscribers in the second quarter and 1.0 million in the third quarter.
Given the underperformance of Warner Bros. Discovery’s studios and linear headwinds within the networks segment, Feldman lowered his stock price target for the company. However, he noted the positive impact of strong free cash flow in the second quarter and the anticipated box office success of the film “Barbie” in the third quarter.
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Warner Bros. Discovery’s streaming unit reported a $3 million loss in the second quarter, a significant improvement from the $558 million loss in the year-ago period. The company aims to make its U.S. direct-to-consumer business profitable in 2023, a year ahead of its previous guidance. Management is committed to prioritizing sustainable profitability over chasing subscribers at any cost.
Investors are expected to view Warner Bros. Discovery’s earnings report as evidence that the company is delivering on its promise to lead the push toward streaming profitability. The company reported a double-digit increase in quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA), driven by the strong performance of its streaming unit. However, EBITDA in the Studios unit fell below estimates due to challenging comparisons with the previous year’s quarter.
The Networks unit also faced headwinds, with advertising revenue declining by 13% after excluding the impact of foreign currency exchange. Factors contributing to the decline included audience declines in domestic general entertainment and news networks, as well as soft advertising markets in the U.S. The absence of the NCAA March Madness Final Four and Championship, which were broadcast in the prior year, further negatively impacted the year-over-year growth rate. However, this was partially offset by the broadcast of the NHL Stanley Cup Finals.
Warner Bros. Discovery’s overall EBITDA beat expectations and allowed the company to exceed free cash flow forecasts for the second quarter. The company remains focused on paying down debt after the megamerger, having already paid off $9 billion. It announced plans to retire an additional $2.7 billion in debt.
The merger between Discovery and WarnerMedia closed in April 2022, resulting in a repositioned business with greater precision and focus. Warner Bros. Discovery is confident in its future growth prospects and expects to significantly reduce its leverage by the end of the year. The company aims to achieve its target leverage ratio of 2.5-3.0 times gross leverage by the close of 2024.
With the successful launch of Max in the U.S., Warner Bros. Discovery’s direct-to-consumer business is performing well. It has already generated positive EBITDA in the first half of the year. The company is optimistic about capitalizing on growth opportunities that will drive shareholder value, and it remains committed to its strategy of delivering profitable streaming services.
