Warner Bros. Discovery Q3 Earnings: Mixed Results, but Strong DTC Growth Provides a Silver Lining
Warner Bros. Discovery, Inc (NASDAQ: WBD) reported its fiscal third-quarter earnings, revealing a mixed bag of results. While overall revenue slightly missed analyst expectations, showing a 3% ex-FX year-on-year decline to $9.623 billion, the company exceeded expectations with a 5-cent EPS, beating the predicted 9-cent loss. This positive EPS, combined with a strong performance in its Direct-to-Consumer (DTC) segment, sent the stock price soaring in premarket trading. However, challenges remain in the traditional media landscape, with declining linear TV viewership impacting revenue streams. The key question now is whether the robust DTC growth can offset weaknesses in other divisions and solidify WBD’s long-term strategy.
Key Takeaways:
- Revenue Miss: Overall revenue fell short of expectations at $9.623 billion, down 3% year-on-year (ex-FX).
- EPS Beat: Earnings per share beat expectations, posting a 5-cent profit against a projected 9-cent loss.
- DTC Dominates: The Direct-to-Consumer (DTC) segment shone, with a 9% ex-FX revenue increase, fueled by Max subscriber growth of 7.2 million.
- Content Challenges: Studios revenue plummeted 17% (ex-FX) due to lower theatrical and game performance compared to the prior year’s strong releases like Mortal Kombat 1 and Barbie.
- Stock Surge: WBD stock experienced a significant 10.30% premarket jump following the earnings announcement.
Detailed Breakdown of Q3 Performance:
Studios Segment: A Story of Two Years
The Studios segment reported a concerning 17% ex-FX year-over-year decline in revenue, reaching $2.68 billion. This downturn is primarily attributed to a significant drop in theatrical revenue (down 40% ex-FX), largely because the success of Barbie in the previous year wasn’t matched this time. While Beetlejuice 2 and Twister were released, they failed to replicate the blockbuster performance of Barbie.
Adding to the pressure, Games revenue experienced a 31% ex-FX decline, mainly because the exceptional performance of Mortal Kombat 1 in the prior year proved difficult to surpass.
Networks Segment: Navigating a Shifting Landscape
The Networks segment, while showing a positive 3% ex-FX growth to $5.01 billion, reveals a complex reality. The exit from AT&T SportsNet dragged down the growth rate by 200 basis points. Distribution revenue fell 7% ex-FX, reflecting the ongoing decline in U.S. pay-TV subscribers – a trend affecting many traditional media companies.
Further complicating the picture, advertising revenue dropped 13% ex-FX. This decline stemmed from reduced viewership across domestic general entertainment and news networks, coupled with a generally soft advertising market in the U.S. While European Olympic broadcasts provided some offset, this wasn’t enough to counteract the negative trends within the U.S. market.
DTC Segment: Max’s Meteoric Rise
In stark contrast to the struggles in other segments, the Direct-to-Consumer (DTC) segment delivered exceptional performance. Revenues soared by 9% ex-FX, reaching $2.63 billion. This impressive growth is largely attributed to Max’s expansion and growing popularity.
Distribution revenue increased by 8% ex-FX, propelled by a remarkable 15% surge in subscribers driven by the successful launch of Max in Latin America and Europe earlier this year. The company also benefited from higher pricing strategies implemented after the launch these new markets. The impact of strategically increasing prices was further shown by the fact that advertising revenue within this sector experienced a significant 51% ex-FX jump, primarily thanks to the rise in domestic ad-lite subscribers.
Overall DTC subscribers now stand at 110.5 million, up from 95.9 million a year ago. The global DTC average revenue per user (ARPU) also saw a modest 1% ex-FX increase to $7.84.
Management Commentary and Future Outlook
Warner Bros. Discovery CEO David Zaslav highlighted the company’s rapid international growth and commitment to producing diverse, high-quality content as key drivers behind the DTC segment’s success. He specifically praised Max’s 7.2 million new subscribers this quarter, calling it, “the platform’s highest quarterly growth since launch.” Zaslav stressed that this robust growth moves Max closer to their 2025 financial goals.
Zaslav also emphasized their new strategic partnership with Charter Communications (CHTR), which encompasses both linear network distribution and Max bundling. He views this partnership as a strong validation of their content portfolio’s value. He also confirmed plans regarding Max’s upcoming expansion. Plans currently include introducing Max in seven Southeast Asian markets and bringing the service to Australia next year. The company also indicated the possibility of further increasing prices on the Max service, suggesting there is “A Fair Amount Of Room” for price adjustments.
Financial Highlights beyond Revenue and EPS
Beyond the revenue and EPS figures, the company reported an adjusted EBITDA of $2.41 billion, representing an ex-FX decline of 18%. As of September 30, 2024, Warner Bros. Discovery generated $0.8 billion in operating cash flow and held $3.5 billion in cash and equivalents.
Conclusion
Warner Bros. Discovery’s Q3 results present a mixed picture. While the overall revenue shortfall and decline in traditional media segments are concerning, the explosive growth of the DTC segment, particularly Max, offers a significant bright spot. The future success of Warner Bros. Discovery will depend on its ability to continue fostering Max’s growth, while simultaneously addressing challenges in its traditional media businesses. The company’s strategic partnerships, international expansion plans, and potential for price increases in the DTC segment showcase a proactive approach towards navigating the ever-evolving entertainment landscape. The market’s positive response to the earnings announcement is an indication of a belief in this strategy but only long-term results will show whether this confidence was well-placed.
