Warner Bros. Discovery CEO David Zaslav
Courtesy of Warner Bros. Discovery
Warner Bros. Discovery posted a first-quarter profit of $86 million for its Direct-to-Consumer (DTC) unit, which includes its streaming and premium pay-TV services, compared with a $50 million year-ago profit, after turning a full-year 2023 profit earlier this year.
The company, led by CEO David Zaslav, said Thursday that it ended March with 99.6 million global streaming subscribers, compared with 97.7 million as of the end of 2023 and ahead of Wall Street expectations. Segment revenue was nearly unchanged at $2.46 billion, helped by subscriber price increases and higher advertising revenue, driven by Max U.S. ad-lite subscriber gains.
TD Cowen analyst Doug Creutz had recently forecast the mixed first-quarter results in this key unit. “In DTC, we expect WBD to finish the quarter with 98.8 million OTT subs (52.2 million domestic,
and 46.6 million international), with sequential total sub growth of 1.2 million quarter over quarter,” he wrote in a preview report. “We estimate segment revenue of $2.64 billion (+8 percent year-over-year) and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $96 million.”
With Netflix profitable and being seen by some observers as the king of streaming, Wall Street has been looking for Hollywood conglomerates to make their streaming business units profitable after an initial focus on subscriber growth. Most sector giants ended 2023 with a ways to go. But their streaming units are not directly comparable though as they sometimes don’t include all streaming operations of a company or include additional business. WBD’s DTC segment, for example, consists of its streaming and premium pay-TV services, meaning HBO is part of it.
On a morning analyst call, Zaslav discussed plans for his studio and rival Disney to bundle their streaming services with an offering to launch this summer. “Two of the world’s most storied content companies are joining forces to deliver consumers the best and most diverse offering of entertainment at a very attractive price,” he told analysts.
And on the sports front, Zaslav talked briefly about Warner Bros. Discovery looking to retain NBA media rights as they come up for renewal. “We’re in continuing conversations with them (NBA) now. And we’re hopeful that we’ll be able to reach an agreement that makes sense for both sides,” he told analysts. Zaslav added WBD has matching rights to answer third party offers as the NBA hold media rights negotiations with other players.
WBD’s quarterly earnings report on Thursday showed weakness at its studios and networks segments though.
Studios results were hit by fewer TV shows delivered than in the year-ago period due to the Hollywood strikes’ fallout, as well as a weaker performance in video gaming. In the first quarter of 2023, the video game Hogwarts Legacy did very well, making for a tough comparison, while in the latest quarter, Suicide Squad: Kill the Justice League didn’t do well, hitting gaming revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA).
Studios revenue fell 13 percent to $2.82 billion, with EBITDA dropping 70 percent to $184 million. Games revenue was down “significantly,” WBD said, while TV revenue “declined meaningfully as production delays resulting from the WGA and SAG-AFTRA strikes led to fewer episodes delivered during the first quarter of this year, as well as the timing of content availabilities and licensing deals.”
Theatrical revenue, however, “increased significantly due to Dune: Part Two and higher carryover from fourth-quarter 2023 titles,” the company noted. “Home entertainment revenue grew materially due to Wonka and Aquaman and the Lost Kingdom.”
The first-quarter Studios results came after a year of major transition for Hollywood studios affected their financials in 2023.
WBD’s networks unit was hit by continued weakness in the linear business and an advertising revenue miss, which was only partially offset by cost management initiatives. Revenue and EBITDA both decreased by 8 percent to $5.13 billion and $2.12 billion, respectively.
Addressing analysts, Zaslav predicted more collaborations between Max and the studio’s linear TV channels following the success of ID’s Quiet on Set: The Dark Side of Kids TV premiere, including on Max. “The true crime vertical has great traction on Max, and by leveraging the production scale at ID, we will be able to curate additional series very effectively and efficiently that work across Max and our other distribution platforms,” he argued.
Ad revenue in the unit fell 11 percent, “primarily driven by audience declines in domestic general entertainment and news networks, as well as the soft linear advertising market in the U.S. and Latin America,” only partially offset by growth in the Europe, Middle East and Africa region. Distribution revenue decreased by 6 percent, driven by the firm’s AT&T SportsNet exit and “declines in U.S. pay-TV subscribers, partially offset by increases in U.S. contractual affiliate rates and inflationary impacts in Argentina.”
WBD’s first-quarter total revenue fell 7 percent to $9.96 billion, while the company reduced its expenses by 9 percent to $10.23 billion. That led to a quarterly loss of $966 million, including $1.88 billion of “pre-tax acquisition-related amortization of intangibles, content fair value step-up, and restructuring expenses.”
Adjusted EBITDA, another profitability metric, dropped 20 percent to $2.10 billion, “primarily driven
by the success of Hogwarts Legacy in the prior-year quarter while Suicide Squad: Kill the Justice League generated significantly lower revenues in the current year quarter,” the conglomerate said.
The results fell short of Wall Street estimates, but Zaslav focused on operational successes.
“We are pleased with our progress in the first quarter as evidenced by strong results in important key performance indicators,” he said. “We delivered meaningful growth in our streaming business with a nice acceleration in ad sales” and will “soon be rolling out Max to 29 countries across Europe, and the content lineup for Max over the coming year is one of our strongest ever.”
Added the WBD CEO: “Warner Bros. Pictures also had a strong start to the year as the first studio to reach $1 billion in both overseas and global box office, and they have a great slate in the works.”
Zaslav also touted a financial metric that he and his CFO Gunnar Wiedenfels have been focusing on. “Importantly, we once again delivered strong free cash flow (FCF), even in our seasonally weakest FCF quarter,” he concluded, a reference to FCF posting a $1.3 billion swing from a year-ago loss to $390 million in the first quarter. “We continue to make bold moves to transform our company for the future as we position ourselves to take full advantage of the opportunities ahead.”
WBD shares were down 3.9 percent at $7.50 in pre-market trading, close to the stock’s 52-week low of $7.34 hit on May 1.
