Warner Bros. Discovery made significant progress towards streaming profitability and debt reduction through cost-cutting in 2023. But the company’s subscriber growth has stalled in recent quarters, and industry-wide pressures on the linear business, as well as ad market uncertainty have clouded its longer-term visibility.
On Friday, when WBD releases its fourth-quarter earnings, Wall Street will be watching to see if the media giant can keep its recent momentum going and turn its subscriber declines around — and if its efforts will be enough to offset those secular pressures.
“From an overall financial perspective, I’d say the bar is pretty low,” Morningstar analyst Matthew Dolgin told TheWrap. “Weakness in the networks business should lead to a year-over-year revenue contraction.”
Analysts surveyed by Zacks Investment Research are currently expecting the company to report an earnings loss of 11 cents per share and revenue of $10.23 billion.
Shares of Warner Bros. Discovery, which closed at $9.57 apiece at the end of Wednesday’s trading session, are down 37.9% in the past year.
WBD earnings during the fourth quarter have been “a little bit of a mixed bag so far” and there’s “a lot of pressure for streaming platforms to hit profitability targets over subscriber scale this year,” Omdia media analyst Sarah Henschel told TheWrap.
In the third quarter, WBD’s streaming business posted a profit of $111 million, a $745 million year-over-year improvement and its second profitable quarter in a row. Chief financial officer Gunnar Wiedenfels noted on the earnings call in November that the company was on track to “at least break even” across the direct-to-consumer segment.
”I’d like to see DTC profits continue trending upward after management emphasized on the last call that near-term profit growth isn’t the foremost priority,” Dolgin said.
While Warner’s cost-cutting efforts have helped deliver profits in its streaming business for the past two quarters, they may have been “too aggressive” and could negatively impact its future growth, Third Bridge senior analyst Jamie Lumley told TheWrap.
“Having a bit of a dearth of content might lead to further subscriber losses,” he said. “We saw the Max platform drop subscribers over the course of last year, so there could be an ongoing challenging period for Max’s performance.”
Investors will be watching to see if the company can return to domestic subscriber growth after two consecutive quarters of decline. WBD currently has 95.1 million subscribers globally, including 52.6 million domestic subscribers and 42.5 million international subscribers.
The ad-supported tier is one of the “most important levers WBD can pull for the DTC segment domestically,” said Deutsche Bank analysts Bryan Kraft and Benjamin Soff. Dolgin added that investors need to see signs that all the live content recently added to Max is “bearing fruit.”
Despite widespread job cuts and efforts to convert to a digital future, analysts don’t expect the company to be able to offset its losses from linear networks by 2026. About 51% of WBD revenue comes linear TV ads, subscriptions and content licensing, Macquarie Research analyst Tim Nollen estimated.
TD Cowen expects WBD’s networks adjusted EBITDA to fall 11% year over year to $2.21 billion. Overall segment revenue is expected to fall 7% year over year to $5.1 billion, dragged down by a 10% drop in advertising revenues.
Wiedenfels has previously warned that Warner hitting its gross leverage target range of 2.5 to 3 times adjusted EBITDA by the end of 2024 would be difficult without a “meaningful recovery of the television ad market.”
Kraft and Soff expect WBD to land “a touch above” that target for the end of the year, but anticipate lower spending by the company as it continues to pay down debt.
Analysts will be watching closely to see if Warner continues to make progress on its debt reduction efforts and if free cash flow can continue to grow after the benefit from the Hollywood strikes subsides.
As of the end of the third quarter, WBD reported $45.3 billion of gross debt. Free cash flow climbed to $2.06 billion from negative $200 million a year earlier, primarily due to cost-cutting but also a result of the lack of content spend during the strikes.
During last quarter’s call, Wiedenfels said Warner was on track to “meaningfully exceed” $5 billion in free cash flow for the year and to be “meaningfully below” four times net levered by the end of the fourth quarter.
One way that Warner has been able to reduce debt and boost free cash is through content licensing. Wells Fargo analyst Steve Cahall believes the company could find “billions of untapped revenue potential” by licensing marquee titles like “The Sopranos,” “Game of Thrones” or “Friends” to other deep-pocketed streamers. However, he warns that it’s a “double-edged sword” that could come at the expense of Max engagement.
But while recent licensing deals with Netflix have opened up an avenue for near-term monetization, the move raises concerns about the impact to Warner’s overall subscriber growth going forward, Lumley said.
Analysts are likely to focus in the earnings call on Warner’s new joint streaming sports venture with Fox and Disney.
The service, which is slated to launch in the fall and has not disclosed its name or price point, will provide subscribers with access to content from linear sports networks including ESPN, FOX, TNT, TBS and the ABC network. Content will include more than a dozen leagues including the NFL, NBA, MLB and the FIFA World Cup. Subscribers would also have the option to bundle the product with Disney+, Hulu and Max.
The venture will have its own independent management team, with each of the three media giants owning one-third of the company. Disney, Fox and Warner Bros. Discovery will also have equal board representation and can license their sports content to the joint venture on a non-exclusive basis.
Analysts will be looking for more details about the partnership, including how it will co-exist with sports on Max as well as any legal headwinds it faces. On Tuesday, Fubo filed an antitrust lawsuit seeking to block the venture. The Department of Justice is also reportedly planning to launch an antitrust review.
“Should the service succeed, it would be a turning point for sports and linear viewing,” Henschel said. “It opens the door for greater transition from the linear pay TV advertising space to the online advertising space.”
Analysts also will be listening for any updates about Turner Sports’ NBA rights, which are set to expire at the end of the 2024-2025 season.
The call will also be an opportunity for Warner Bros. Discovery to share its plans for potential mergers and acquisitions. CEO David Zaslav teased during the previous call that the company’s debt reduction efforts would allow it to be “really opportunistic over the next 12 to 24 months.”
This April marks the two-year anniversary of the 2022 merger that created Warner Bros. Discovery, which was executed under a Reverse Morris Trust for tax advantages. Once the RMT’s two-year lockup period expires, WBD will be free to make acquisitions without incurring a hefty tax bill.
In December, Zaslav met with Paramount Global CEO Bob Bakish about a potential merger. While a hypothetical acquisition of Paramount could help WBD gain streaming scale, family-focused IP and CBS News, it could also result in more linear exposure, more debt and more scrutiny from lawmakers on Capitol Hill. There’s also been speculation that NBCUniversal parent Comcast could buy WBD outright, though CEO Brian Roberts recently talked down the idea.
“We think this would have a hard time getting past regulators and expect this would need to be an all-stock deal as WBD has limited financial capacity,” TD Cowen analyst Doug Creutz added in a recent research note.
The current M&A deal environment is less favorable in Washington, D.C., and “equity investors have a very limited tolerance for more debt regardless of the strategic rationale,” Cahall said.
That environment has some analysts seeing a potential for WBD to fall short of its consensus estimates. “We no longer see significant upside to consensus estimates — downside in fact — and we don’t currently see a positive catalyst including M&A that can drive multiple expansion in 2024,” Cahall said.
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