Warner Bros. Discovery’s first quarter as a combined company was ugly

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In the first quarter as a combined company,

Warner Bros. Discovery

missed Wall Street estimates across the board, saw streaming subscriber growth slow and leverage increased.

Warner Bros. Discovery stock (ticker:WBD) fell about 12% in after-hours trading on Thursday.

Warner Bros. Discovery is the product of a spring merger between Discovery and Warner Bros., which spun off AT&T (T) to refocus its telecommunications business. The combined media company includes HBO Max and Discovery+, the Warner Bros. Hollywood studio and cable television channels including TNT, TUSEN, Discovery, Food Network and HGTV. That transaction closed on April 8, one week into the second quarter.

On Thursday afternoon, WBD reported second-quarter revenue of $9.8 billion, or $10.8 billion if the companies were united for the full three months. This pro forma turnover was about 3% lower than in the same period a year earlier. Wall Street analysts had forecast an average of $11.8 billion in revenue.

WBD reported a net loss of $3.4 billion, or $1.50 per share, versus consensus of earnings of 11 cents per share before the report. Pro forma, that would have been a loss of $2.2 billion. It includes approximately $2 billion in restructuring and transaction-related costs and an additional $2 billion in amortization of intangible assets.

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Reported adjusted earnings before interest, taxes, depreciation and amortization — or EBITDA — was $1.7 billion, a 32% year-over-year decline and well behind analysts’ forecast of $2.5 billion. With the pro forma adjustments, adjusted EBITDA would have been $1.8 billion.

The company’s free cash flow was $789 million in the quarter, up 4% but below the consensus of $961 million.

“We’ve had four busy, productive months since the launch of Warner Bros. Discovery, and we are more convinced than ever of the tremendous opportunity ahead,” said WBD CEO David Zaslav, who was previously CEO of Discovery. . “We are confident that we are on the right track to achieve our strategic goals and truly excel, both creatively and financially.”

WBD ended the second quarter with 92.1 million streaming subscribers on HBO Max and Discovery+, up from 1.7 million over the period. That’s growth retardation. At the end of the first quarter, HBO and HBO Max had 76.8 million subscribers, an increase of three million in the first three months of the year, and Discovery+ had 24 million subscribers, an increase of two million.

Average revenue per subscriber was $7.66 in the quarter. The company did not report subscriber figures for the two services separately on Thursday. Combining HBO Max and Discovery+ into one service is part of the plan, with a US launch in the summer of 2023, followed by international markets until 2024. A free, ad-supported tier of the service is in the works. , Zaslav said Thursday in addition to existing ad-free and ad-lite versions.

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Streaming segment revenue was $2.4 billion in the second quarter, up 2%, and adjusted EBITDA was a loss of $560 million — versus a pro forma loss of $235 million in the same period a year ago.

Management said Thursday it expects the peak losses in streaming this year, heading for an adjusted Ebitda breakeven in 2024 and profits of at least $1 billion by 2025 — when the service could reach 130 million global subscribers. and the average revenue per user will increase. be higher.

WBD’s largest TV network business had revenue of $6.1 billion, down 1%, and adjusted EBITDA of $2.4 billion, down 12%. Higher costs for sports rights were the cause of the decline in profits.

Finally, WBD’s movie studio segment had $3.4 billion in revenue and $409 million in adjusted Ebitda, up 1% and down 7%, respectively.

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Management guidelines as of May 2021, when the spin-off and merger were announced, called for total revenues of $52 billion by 2023, including at least $15 billion in streaming revenue; $14 Billion in Adjusted Ebitda; and about $8 billion in free cash flow next year.

Management also targeted $3 billion in annual cost savings from the merger, of which $1 billion has already been achieved. The new management shut down the TUSEN+ streaming service shortly after the acquisition, and only about a month after its launch. Executives walked Thursday through several other areas they focused on for cost-cutting, including scrapping some less promising TV and movie productions.

WBD had net debt of $49 billion at the end of the second quarter, or 5.0 times adjusted EBITDA. Management plans to reduce leverage to 2.5 to 3.0 times within two years.

WBD shares have recovered more than 30% from late-June lows, but remain cheap: WBD had a market cap of nearly $41 billion and traded for 12 times future earnings at Thursday’s closing price. Shares were still down 29% since the AT&T/Discovery deal closed April 8 through Thursday. The S&P 500 has fallen 7.4% over that period.

Write Nicholas Jasinski at [email protected]

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