Warner Bros. Discovery Earnings Call Reveals Progress On Debt Mountain, But Streaming Subscribers Down

Key takeaways

• Warner Bros. Discovery reported downbeat earnings across the board for the second quarter
• However, the company’s short and long-term work on reducing its $50 million debt has impressed Wall Street
• Warner Bros. Discovery shares were up as high as 3% at the news

Warner Bros. Discovery has made a lot of headlines lately. With rumored layoffs and restructuring its advertising business, the ongoing writers’ and actors’ strike and merging its streaming services, plenty could have rocked the financial boat for the second quarter.

The company suffered losses, but the way it’s handling the substantial debt since the merger last year sent the share price upwards instead of sliding. Let’s look at the gritty details and how Warner Bros. Discovery plans to turn the ship around, despite of the headwinds it faces.

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What do Warner Bros. Discovery’s Q2 earnings look like?

The film and TV titan Warner Bros. Discovery, made more losses in the second quarter. Earnings per share arrived at a loss of 51 cents, surpassing analyst expectations of a 38 cents per share loss. Revenue was also down, reported at $10.36 billion versus the $10.44 billion anticipated, and 4% lower than last year when considering the merger and foreign currency impact.

The total net loss was $1.24 billion, but this significantly improved from last year’s dismal Q2 result of a $3.42 billion net loss and $1.50 losses per share. The studios were a big reason for the revenue drop, as revenue declined 8% to $2.58 billion due to underperforming movies like The Flash (though this likely won’t be the case in the third quarter with the smash-hit Barbie film).

Warner Bros. Discovery is also a big player in the streaming service world, but streaming subscriber numbers also disappointed. Global direct-to-consumer streaming subscribers were at 95.8 million, coming in below analyst estimations of 96.7 million. During Q2 Warner Bros. Discovery merged its Discovery+ and HBO Max services to create Max, which could be partially to blame for the drop in subscribers. Streaming was profitable for the first time in Q1 for Warner Bros. Discovery, but the second quarter left investors cold: the segment recorded a $3 million loss.

What was said about the writers’ strike?

Regarding the actors’ and writers’ strike that has left Hollywood at a standstill for months, CEO David Zaslav took a conciliatory tone during the earnings call. He said that given Warner Bros. Discovery is “in the business of storytelling”, the company “cannot do that without the entirety of the creative community, the great creative community, without the writers, directors, editors, producers, actors, the whole below-the-line crew”.

A disappointing earnings beat from Warner Bros. Discovery might give SAG-AFTRA, the biggest actors and writers union, some leverage. Hollywood is striking over pay conditions, with many of the union’s members unable to qualify for healthcare benefits, as well as growing concern over the use of AI in the industry.

So far neither side has budged, though the strikers got some fresh motivation at the news last week that streaming giants like Netflix
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, Amazon
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Prime and Sony are paying hundreds of thousands of dollars for AI experts. The Netflix role had a salary range of up to $900,000, which comedian Rob Delaney wryly pointed out could give a living wage to 35 actors and provide healthcare for them and their families.

The financial figures, paired with striking workers, should leave investors concerned. Moody’s predicts the studios renegotiating contracts could cost them between $450 million to $600 million per year for the next three years.

How is Warner Bros. Discovery handling its debt?

Since Discovery’s acquisition of Warner Bros. was finalized last year, the merged company has been making strides towards reducing the massive $50 billion debt it amassed. One of the cost-cutting measures has been layoffs, with several key executives departing the company and job losses affecting the TV studios Adult Swim, the Discovery Channel and TLC, among others. Rumors are now swirling of rolling job cuts throughout the summer.

As of the second quarter, it’s paid off $1.6 billion in debt and is looking to pay off $2.7 billion more with a cash tender offer. Warner Bros. Discovery ended the second quarter with $47.8 billion left to pay but increased its free cash flow to $1.7 billion.

It’s been previously stated that Warner Bros. Discovery is looking to lower its debt-to-EBITDA ratio to below four times, with any spare cash going towards paying the debt off. One of those money-making avenues is licensing out its content, which generated $410 million in the second quarter alone, triple the amount from Q2 last year.

Advertising is a trickier problem to solve, given the pullback in spending due to high inflation and higher interest rates. Ad revenue for the networks was flat for the second quarter, with Zaslav calling the sustained drought in advertising “unusual” and that “a lot of us expected that there would be a meaningful recovery in the second half of the year, and we haven’t seen it”.

Warner Bros. Discovery has to hope its new ad-supported tier for the Max streaming service will do the trick, though early signs are promising – ad revenue was up 25% for the quarter on a pro forma combined basis.

Wall Street’s reaction

Despite the earnings beat showing more losses, the headway Warner Bros. Discovery made with its towering debt was enough to convince Wall Street about its long-term profitability. Warner Bros. Discovery shares climbed as much as 3% at the news, with the stock having already gained 35% this year.

Compared to its peers’ stock performance, Warner Bros. Discovery is in the middle of the pack. Netflix’s share price climbed 46% in 2023, but Disney, undergoing a mammoth $5.5 billion restructuring effort, has lost 3.9%.

The bottom line

Warner Bros. Discovery got off lightly because investor expectations were already that the media conglomerate would have losses. But given the substantial effort it’s put in to get things back on track, that was enough to keep Wall Street reassured that there’s a silver lining at the end of the tunnel for Warner Bros. Discovery.

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